Susceptibility to Mortgage Rates
A recent study from RBC shows that Canadians (35-44) are deeply in debt mainly due to the high prices they have paid on their property. This data is based on Statistics Canada from ’99 to 2012, and over this time, 60 percent of the increases was due to increasing property prices.
The time period from ’99 to 2012 was showing a 4.6 percent property appreciation, that being compared to the previous 20 years which was showing 0.3 percent per year property appreciation.
From the chart above, we can see for the Greater Toronto area, from Jan 2011 to Jan 2015, the average residential property price went from around $425,000 to just over $550,000.
The following Mortgage rate data below is taken from the Bank of Canada, then the average was calculated for the full year.
We can see a steady decline in interest rates over the past 20 years, and mortgage rates are at record lows. Even with the average mortgage rates declining over the years, current Canadians (35-44) are not paying off their mortgages at faster rates the RBC study has found.
For the next little demonstration, we will look at a property purchased at today’s Residential average price for the Greater Toronto area. Then we will see what the actual mortgage rate would be based on some of the past yearly average mortgage rates.
The idea here is to show you just how much of a change in your mortgage payments will happen with some of the past historical mortgage rates.
Amortization rate for the calculations will be 25 years.
Rate type is based on 5 year fixed (average)
Payment Frequency is set to Monthly.
Average Residential property price will be for Jan 2015 at $550,000
Mortgage Amount: $550,000
Interest Rate: 4.08 (Yearly Average for 2014)
Payment Amount (Monthly): $2,917.02
Mortgage Amount: $550,000
Interest Rate: 5.05 (Yearly Average for 2009)
Payment Amount (Monthly): $3,214.51
Payment Increase Per month (vs 4.08%): $297.49
Mortgage Amount: $550,000
Interest Rate: 6.04 (Yearly Average for 2003)
Payment Amount (Monthly): $3,532.03
Payment Increase Per month (vs 4.08%): $615.01
Mortgage Amount: $550,000
Interest Rate: 7.18 (Yearly Average for 2001)
Payment Amount (Monthly): $3,913.61
Payment Increase Per month (vs 4.08%): $996.59
Mortgage Amount: $550,000
Interest Rate: 8.02 (Yearly Average for 2000)
Payment Amount (Monthly): $4,204.70
Payment Increase Per month (vs 4.08%): $1287.68
Interest Rate Hike Vulnerability
Just from the sample data above, we can see that with just under 1 percentage interest rate hike adds on just under $300 to the monthly mortgage rate. As with any debt that you have, the sooner you can pay it off, the less interest you will be paying. With the sizeable mortgages young Canadians have, keep your overall expenditures in check, pay your debts and save for the future.
