⬆️Higher Rates Vs. Lower Home Prices⬇️
It’s hard to imagine that a 2.49% mortgage rate was considered high just one year ago. We became spoiled with the pandemic driven sub-2% rates available during the latter half of 2020 and the majority of 2021.
When the real estate market peaked in February 2022, the average 5 year fixed rate climbed back to 2.79%….exactly where it was when the pandemic began in early 2020.
It continued to increase from there. As of today, It’s at 5.95% (when this blog was written😦)
Yes, rates are substantially higher than what we’ve been used to over the last decade. But rates are only one component, and contrary to popular belief, they aren’t what’s most important. What’s most important is the overall cost.
Sure, it would be great to get a rate starting with a 2 on your new home purchase… but you also need to consider where home values are today compared with where they were earlier in the year.
The question is… would you have been better off buying earlier this year when rates were lower?
Or buying today at higher rates, but with lower home prices?
First, let’s take a look at where Toronto (pretty much identical to Vancouver) home prices are today vs. February 2022.
|Home Type||February 2022||October 2022||Difference|
|All Home Types||$1,334,544||$1,089,428||$245,116|
*Source: Toronto Real Estate Board
According to the Toronto Real Estate Board, the average value of all property types combined have dropped by $245,116 since the peak.(https://www.crea.ca/housing-market-stats/canadian-housing-market-stats/national-price-map/)
Now let’s look at how this compares with the additional cost of higher mortgage rates.
The first example is if you purchased back in February for the average price using the average 5 year fixed rate available at that time.
The second example will be if you purchased in October at the current market rates.
Buying in February 2022
Purchase price: $1,334,544
Down payment: $266,908.80
Mortgage amount: $1,067,635.20
Amortization: 30 years
Monthly payment: $4,372.06
Balance at end of term: $945,236.99
Interest paid over 5 years: $139,925.99
Buying in October 2022
Purchase price: $1,089,428
Down payment: $266,908.80*
Mortgage amount: $822,519.20
Amortization: 30 years
Monthly payment: $4,458.70
Balance at end of term: $756,223.23
Interest paid over 5 years: $201,266.03
*Using the same down payment for each example to keep it as an apples-to-apples comparison
Difference in interest paid over 5 years: $61,340.04
Difference in price paid for home: $245,116
The monthly payment would be $86.64 higher and you’ll have paid an additional $61,340 in interest over the term, but you would have saved $245,116 on the price of the home. You’ll also owe $189,013.76 less on your mortgage at the end of the term.
This is a perfect example of why higher mortgage rates shouldn’t stop you from purchasing.
The numbers used above are based on the Toronto real estate market as a whole. The actual numbers can vary from one area to the next, even within Toronto itself. Your realtor will be able to provide you with the exact numbers for your desired market. If you don’t have one, we can refer you to an experienced, client focused realtor in your area.
Should You Wait For Rates To Drop?
Once the Bank of Canada gets inflation under control, rates are expected to drop. Their target is to have inflation down to 3.00% by the end of 2023 and 2.00% by the end of 2024. Their focus will then change from battling inflation to restoring the economy, which will require them to cut their rate.
Sure, you can wait for rates to come down. But there will be so much pent-up demand for real estate by that time, so be prepared to battle through a sea of intense buyer competition. Anyone who has tried to purchase a property over the last few years can relate to being constantly out bid while watching home prices climb higher and higher.
Everyone wants to buy at the bottom. But the problem is, we don’t know where the bottom will be. Once it’s clear, be prepared to be shut out by the barrage of home buyers that were also waiting for the same moment. By that time, it will be too late.
While today’s mortgage rates can be a turn off if you’ve been following the rate market for the last couple of years in particular, they have created a huge opportunity for home buyers. The rapidly rising rates have scared many into sitting on the sidelines. The lower demand has resulted in a large drop in home values that can far exceed the additional cost created by higher mortgage rates.
It’s not about the rate.
It’s about getting in at a time with the right combination of mortgage rate and purchase price, which is the era we are now entering. It’s great to have a low mortgage rate, but not if it means spending hundreds of thousands more for the home. At the end of the day, what’s most important is keeping as money in your pocket as possible.