Trouble in 2014?

Future-Mortgage-Rates After the economy recovers, “rates can only move in one direction—up,” says author and former MP, Garth Turner.

Like him or lump him, Turner thinks many homeowners will have a rude awakening in five years when they come up for renewal and rates are “way up” (his prediction).

Turner’s 2014 interest rate assumption of 11% seems intuitively off base, but he poses a credible question nonetheless. If someone has a 4% interest rate today, and is squeaking by, how would they do at, say, 7%?

A 3% rate hike would bring us back to the 10-year average of the Bank of Canada’s key interest rate.  That is a clear possibility and it would jack up payments 33% on a typical $200,000 mortgage.

While most would be able to handle a $350/month payment increase, it could be trouble for more highly leveraged Canadians, or those without stable jobs.

Then again, this looming “disaster” could be overstated as well. With the average Canadian household earning about $70,400 (the latest stats we could find) it would take less than a 2% annual wage increase over five years to offset these $350/month higher payments.

All this aside, however, if you’re finding your debt ratios are high now, think carefully before buying the most expensive house you can afford.  Just because today’s rates are low and accommodating doesn’t mean 2014 will be as hospitable.

As a rough guideline, if your TDS ratio is above 40-41%, then you’re pretty leveraged.  You can check out your own debt ratios on the bottom of this helpful page from Centum LendingMax.

  1. Garth Turner, needs to come to grip, he was thrown out as an MP and lost his re-election, and used to produce lender sponsored programming–i.e. mortgage minute-sponsored by CIBC, real estate news-various sponsors-Xceed, Home Trust, now he does not receive the informercial money, and has decided to bite the hand that used to feed him. His prediction of rates going up in the future should not be a surprise for anyone who follows rates.

  2. Hmmmm….
    15 months ago Turner published his book Greater Fool predicting Canadian housing prices tumbling. The book was widely ridiculed by various media and real estate organizations.
    Yet when the smoke cleared, in 2008 Canadian prices were down by 8%, the first nationwide Canadian decrease in prices in 70+ years.
    Seems to me that he has more credibility than most of other news sources for Canadian RE.
    my 2 cents

  3. I stop listening to people a long time ago, analysts or MPs, who either predict UP or DOWN :P
    Honestly I don’t see 11% in 5 years, maybe 7~8%
    I am sticking with Variable for the win :) and hope there will be less principal when it comes to renewal time

  4. what would be a good strategy to avoid the possible high increase of the rates ?
    Should we for example, get a mortgage rate now and keep it variable or fixed but for 1 or 2 years until we start to see rates go up and then in 2010/2011 lock/renew the mortgage with the current rate for 5 years ? this means that instead of 5 years of low mortgage rate we could potentially go up to 7 years of it ?

  5. I don’t see 11% in 5 years either. Could it happen? Possibly, but I think a rate around 6-9% is much more likely.
    If one:
    1) Has a significant downpayment.
    2) Has reasonable finances that aren’t overstretched to make those monthly payments.
    3) Makes some early repayments before 2014.
    4) Has a stable job that is likely to still be around in 2014.
    5) Doesn’t have a maxed-out amortizaton period.
    Then in 2014 renewal of the mortgage should be feasible even if rates are relatively high. Depending on the rate in 2014, to make a renewal “feasible” could require an increase in the amortization period, but c’est la vie.
    As an example:
    4.05% 5-year fixed $275000.00 20-year amortization
    Monthly payments = $1668.80
    Remaining principal in 2014: $225360.67
    If the rate hits 9% is 2014, one could increase the amortization to 25 years for the renewal. This is definitely not ideal, but at least one wouldn’t be homeless:
    9.00% 5-year fixed $225360.67 25-year amortization
    Monthly payments = $1865.94
    Remaining principal in 2019: $209846.76
    The monthly payments would go up about $200, but that would probably be manageable if the finances weren’t overly strained in the first place. That amount could be significantly lower if some early repayments were made too.
    That’s a lot of “ifs”, but it does illustrate what some of the considerations should be before buying a house. I’ve told friends in the past that if they can easily afford a 15-year amortization period, then go for it. If they can only afford a 35-year amortization period, then they might want to think again about buying that house.
    I think the biggest risk is with those who have only 5% down now, have finances stretched to the max, and who have a 35 year amortization period. In 2014 they could be in for a world of hurt should interest rates reach 9%.
    However, if one falls into this latter category and is really worried, there’s always the option of locking in at 5.25% for 10 years (although I still suggest rethinking that purchase).
    As for variable, if I were getting a 5-year fixed mortgage today, I’d still worry about rates. Rates are prime + 0.X% and it’s true they’ll only go up (after a small 0.25% drop in April). After 5 years the interest paid might be a wash vs. a 4.05% fixed 5-year rate, or could even be worse. However, those with prime – 0.8% rates are doing quite well, and will for quite some time. Even if prime jumps to 7%, they’ll still only be paying 6.2%, and right now they’re only paying 1.7%.

  6. Oops.
    As for variable, if I were getting a 5-year fixed mortgage today, I’d still worry about rates.
    I meant to say “if I were getting a 5-year closed mortgage“.

  7. For those who have prime -.8 have 3 year or 5 year variable rate mortgage at least 1 year and half ago. 3 year term variable will be renewed in 1 year and half. 5 year term will be renewsed in 3 year and half. At that time, they need to think which way they want to go variable again or fixed.

  8. This is an extremely likely scenario. The excessive gov’t spending in the south will lead to storng inflationary pushes on our prices. To pull in the inflation hound which the BoC fears more than a recession they will jack up rates very quickly and violently. Waiting for one more round of rate cuts in this deflationary times to run in and lock in longterm fixed rate. I do not want to end up paying more than what I should to the banking cartel in Canada

  9. Is anyone predicting another cut in the majority of posted 5 year closed rates? Should I lock in now or wait another few weeks? Thanks for the help

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