With record setting low interest rates over the last year and a half, its a regular questions from many of our clients, “What if interest rates go up?”
Lets do the math!
Because…all too often the math is missing following the media headlines. Instead, interest rate figures are thrown around and the true meaning is left to your imagination. And our imaginations run wild… as they are not so great at math.
If interest rates double, my mortgage payment will double too…right?
Um no.
A 100% increase in your interest rate (i.e. 2% current and renewing 4%) equates to a 20% increase in your mortgage payment.
What happens if interest rates quintuple?
Double the rate means the payment increased ~20%.
Triple the rate means the payment increased ~40%.
Quadruple the rate means the payment increased by ~65%.
Today (Aug 2021)
Mortgage Rate AM Term Payment Balance at renewal
$100,000 2% 25yr 5yr $423.45 $83,770
Renewal Time (5 years from now)
If rates have quintupled;
Mortgage Rate AM Term Payment Balance at renewal
83,770 10% 20yr 5yr $797.21 $75,047.00
When we take into account that the average mortgage today is $400,000, this would, without question, be a major stress on a household. Although once again… likely still survivable. It would be a lean lifestyle for sure.
And so the real concern here is what?
It’s 2 things.
1. The media should start including some basic math disclaimers around hyperbolic headlines when predicting interest rate increases.
2. What drives increasingly restrictive lending policies, as we’ve seen over the past few years, is a concern about protecting the larger economy as a whole. - The real concern of regulators clearly isn’t the stability of the Canadian family or Canadian households individually. It’s about protecting things like the stability of the banking system.
The concern isn’t Canadians failing to make mortgage payments, quite the opposite, the concern is about Canadians ONLY making mortgage payments and having no money left to spend elsewhere. It’s a halt to consumption of goods and services, not foreclosure.
So, even if rates rise five-fold its unlikely to trigger a market crisis in which tens of thousands of homeowners decide to sell all at once – which is what it would take for prices to decline… that and a shortage of buyers.
The talk in the face of 10% rates would be all about how fast rates are going to come back down. And it’s likely they would do so, rather quickly, just as they did in 83/84. A spike in rates is a bucket of ice water on the economy.
We would, for the most part, weather the storm somehow.
We are happy to assist with any of your mortgage needs and questions. Give us a call today!