It is not when, it is if. I wrote that correctly. If they go up, as in if they go up in time to matter to me or to you, Mr. & Mrs. Homeowner. Maybe they stay low for another ten or fifteen years, and by then my mortgage will be so low, and my income likely increased, that higher rates won’t affect me directly.
Some basic math about today’s mortgage applicant:
The $450,000.00 mortgage at 2.49% on a 25 year amortisation will at the end of the five-year term have an ending balance (up for renewal) of $380,793.81.
The monthly payment of $2013.61 would need to increase as follow, were rates to rise.
If rates are up 1%
$380,793.81 @ 3.49% = $2,201.59 (*20 year amortization)
A very modest $187.98 increase in monthly payment.
It is reasonable to suggest that come renewal time, five years later, that the client’s household income will have increased by at least $187.98.
If rates are up 2%
$380,793.81 @ 4.49% = $2,398.53 (*20 year amortization)
A bit steeper increase, but again, is it reasonable to think that a family that has the $75,000.00 income required to qualify for a $450,000.00 mortgage today (you read that correctly) will have an extra $384.92 per moth five years from now.
This too is a pretty minor income increase over a five-year period.
A 1% rate hike means you wait 30 minutes instead of 45 minutes for a table at The Keg on Friday night.
A 2% rate hike means you wait 15 minutes instead of 45 minutes for a table at the The Keg on Friday night.
Neither of these increases needs to be ‘payment shock’ either – I advise all of clients every New Years Eve to increase their payments by just $25.00, or perhaps $50.00 to buffer against exactly this sort of increase.
Missing from this increasing rate scenario is something totally unspoken of in the media, and that is the fact that as rates rise the federal government will almost certainly increase amortization length. Just as they have strategically shortened it since 2008 as interest rates fell.
So if at 4.49% our theoretical family could not take the squeeze of a $384.92 increase, they will almost certainly have the ability to stretch the amortization back out to 25, 30, 35, or even our old friend the 40 year amortisation . This would dramatically lower payments and keep people in their homes.