Amid a few more ‘sky is falling’ headlines it felt appropriate to inject some basic logic into the equation.
Although I personally continue to foresee prolonged low interest rates, it is worth doing the math on what the cost of interest-rate hikes actually are.
Does a doubling of the interest-rate double ones mortgage payment? the short answer is no it does not.
Calming the headline hyperbole with actual mathematics;
(Although 30 year Amortization is still available, I have used the 25 year as this is the maximum AM allowed for purchases with less than 20% down. *Arguably the higher risk group)
Today
- Mortgage Rate AM Term Payment Balance at renewal
- $100,000 2.89% 25yr 5 yr $467.62 $85,293.20
Renewal Time (5 yrs on)
Mortgage Rate AM Term Payment Balance at renewal
$85,293.20 5.78% 20yr 5yr $596.96 $72,065.97
Assuming one does not lengthen their amortization back out to 25yrs (as would be an option to keep the payments artificially low), the net monthly payment increase, come renewal time, is $129.34 per 100K of the original mortgage balance.
Statistically the average mortgage balance in the province of British Columbia is ~$275,000. This would translate into a $355.68 per month increase in the average mortgage payment in BC in 2019 for those that took a five year fixed this year.
Allowing for a modest 1.5% average household income increase each year, and applying the basic math used to originally qualify (per $100,000 worth of mortgage debt), at renewal time five years down the road average household income should have risen by approximately $193.16 per month.
A shortfall for sure, but hardly one significant enough to trigger ‘blood in the streets’ as so many would argue would be the case.
Skip Starbucks in 2019 and the difference is covered.
Clearly a doubling of interest rates would be unlikely to cause any kind of significant crisis for the majority of homeowners. Instead the concern would be what impact that sort of increase would have on the overall economy, which begs the question; How likely is a doubling of rates any time soon?
It is also my opinion that as interest rates rise (when that day comes) we will likely see a loosening of mortgage guidelines to maintain a balance in the Real Estate Market. Just as the maximum amortization was reduced as interest rates fell it seems plausible that the maximum amortization will be increased as interest rates rise to avoid dramatic payment shock for homeowners.
Thank you for your time.