So That was a Bust…

The recent Bank of Canada interest rate cut on June 5th stirred a mixed response in the real estate realm. While many anticipated a market boost from the 0.25% reduction in the "prime" rate, the impact seemed underwhelming. Despite this being the first Bank of Canada rate decrease since March 2020, the expected market acceleration did not materialize as hoped by industry players.

Let’s look at the numbers.

The average sale price in Guelph is approximately $750,000. Typically people will put 20% down with this purchase or $150,000 leaving a mortgage of $600,000.

*Note, I haven’t included closing costs like lawyers, land transfer fees for clarity.

The 3-year fixed rate mortgage is the most popular in today's market and rates will vary (depending on the lender and the buyer’s credit rating) from 5.00% to 5.30%. Typically the amortization rate will be 25 years. That means monthly payments will range from $3,489.63 at 5.00% to $3,589.34/month at 5.29%. A difference of $99.71 per month.

Assuming the 0.25% drop in the Bank of Canada overnight rate showed up in an equivalent drop in mortgage rates, that means people have been sitting on the sidelines of the market for less than $100 per month or the cost of a cheap coffee per day.

On one hand that doesn’t seem logical or make sense.

On the other hand, we regularly make decisions that are not based upon logic or common sense.

The decision process here is driven by fear of the unknown. Will rates continue to drop? Will house prices continue to soften? People are unsure of what their next move should be. As an industry we are contributing to the confusion because we parrot “news” like the BoC rate drop without context or demonstrating what it means to our clients and the public.

What should have happened is that we should have been promoting that a quarter point interest drop will impact the monthly mortgage payment by approximately $14 per $1,000 in mortgage amount.

The above chart shows what the mortgage payment is per $100K in mortgage amount depending on the interest rate and the amortization period.

Back in the pre-internet days, a chart like this was very useful in figuring out what was an affordable mortgage for home buyers and they could quickly see the impact of interest rate increases or decreases could have on their budgets.

The next part of the conversation was around where the market was going to go.

In today’s environment, prices in some categories (condo apartments) have been dropping due to oversupply. In most parts of the market, prices remain relatively stable or rising slightly because demand is still strong for detached and non-condo homes.

A modest 2% increase in sales prices is $75K which takes the average sales price to $765,000, which means an extra $3,000 on the downpayment and the mortgage increases from $600K to $612,000 and a monthly payment of $3,559.42 (a difference of $72.21) - effectively nullifying the interest rate drop.

The smart buyer sees that the opportunity is in the market today, because any additional interest rate drops will be negated with increased prices. Smart buyers are better off paying a little more on their mortgage today and getting a head start on building equity, rather than waiting for rates to drop and hoping that prices won’t go up.

Remember, hope is not a strategy or a solution. Be informed, look past the hyperbole and work within your budget.

Our team of professional agents and mortgage specialists will take the time to show you where the values are. Book your private consultation today.

Thanks for being a subscriber. Enjoy the weekend!

Paul Fitzpatrick

Appointment Calendar: https://calendly.com/homegrouprealty

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