Affording An Edmonton Mortgage In A Rising Rate Environment

Canadian interest rates have risen steadily over the second half of 2013. This will impact buyers and sellers directly when making changes to the place you call home. Here’s how.

Understanding Mortgage Rates

First let’s make clear that not all mortgage interest rates have been affected. All floating rate mortgage products (variable, line of credit, etc.) have remained untouched as these are directly affected by the Bank of Canada’s prime lending rate which has not moved in the last three years. The area we are addressing are fixed interest mortgage rates which are affected by movements in the Canadian Bond Market.

How This Affects Buyers

The most important point to be aware of as an Edmonton buyer is to plan ahead. If you are even batting around the idea that you are going to be purchasing a home in the next 3-6 months, you should be reaching out and contacting your Realtor and mortgage professional to ensure your financial house is in order. What you will want to ensure is that you will qualify based on the new Canadian mortgage rules, that you have optimized your credit rating, and that you know well in advance what purchase price you can afford.

How This Affects Sellers

For someone looking to sell their home – you will want to know that it is becoming harder for those interested in your property to qualify for their mortgage. First time homebuyers are being limited in the amount of home they can afford through amortization restrictions, higher qualification rates, and of course the obvious – higher interest rates. One of the ways to assist your sale is to offer your existing mortgage if the contract states that it is assumable. If you are sitting at a sub 3% interest rate then adding this fact to your feature sheet can raise additional interest from potential buyers.

As we look ahead to 2014 – the only real prediction for the real estate industry is change. With the reality of a rising interest rate environment upon us – more proposed government restrictions to mortgages being suggested – as well as a hot Edmonton real estate market and rising prices – it is important for both buyers and sellers to take note and do their homework well ahead of making a move.

About 

Michael Smele is a passionate educator about mortgages, personal credit, and finance.

You can find him at Mortgage Truth.

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11 Responses to “Affording An Edmonton Mortgage In A Rising Rate Environment”

  1. carshalton estate agentNo Gravatar 06. Jan, 2014 at 11:13 am #

    Hi there Michael

    Thanks for the tips..i agree with your take on the rising rate.
    I am in the mortgage market and real estate likeyourself but am based in UK

    only we are called estate agents in carshalton …the property prices are going up again here in London and banks are lending 95% again:-)

    happy new year

  2. wsnNo Gravatar 06. Jan, 2014 at 1:42 pm #

    Simple. Stay away from fixed rate mortgages.

    • James CatterallNo Gravatar 10. Jan, 2014 at 4:28 pm #

      That will work as long as you can qualify… Variables and terms shorter than 5 years need to qualify at 5.34%, the Bank of Canada’s Benchmark 5 year rate.

      http://www.jamescatterall.ca
      facebook.com/jamescatterallmortgage

  3. Oiler2020No Gravatar 07. Jan, 2014 at 2:00 am #

    I plan to sell our home and port our existing mortgage to a cheaper house. Mortgage amount AND amortization remain the same, but LTV will increase from 81% to 95%. We own the current home for a little less than 2 years.

    Does CMHC charge a top-up premium to port this mortgage even thou mortgage amount/amortization are the same or less? I don’t see myself paying the premium on the same amount of loan twice.

    Any useful input is highly appreciated!

    • MikeNo Gravatar 07. Jan, 2014 at 12:33 pm #

      Oiler 2020 – so if your purchase price is cheaper on your new home and you have a higher loan to value – are you planning on pocketing the additional equity through this transaction? I don’t know a mortgage lender who will look favourably on that situation. Please clarify

      Carshelton Estate Agent – thanks!

      WSN – just remember that the new mortgage rules require a higher qualification interest rate for anything outside of a 5 year fixed mortgage or longer term – makes it that much more difficult for some potential home buyers – thanks for the comment

      • wsnNo Gravatar 07. Jan, 2014 at 2:16 pm #

        1) The qualification rule is the same for both fixed and variable. So, there is no difference.

        2) My point was about cost of interest. If a person worries about getting qualified, he should reconsider about the purchase and probably should just rent until he can easily qualify.

  4. Oiler2020No Gravatar 07. Jan, 2014 at 2:20 pm #

    Thanks for your response.

    Yes, you are correct! We are downsizing to purchase a second home for investment (rental) purposes. The mortgage lender is the one who forces us to take x amount of loan. They use the 25/25 prepayment option to calculate how much to close/port the existing mortgage without incurring any penalty.

    My question remains unclear, does CMHC charge premium on the same loan twice? There’s nothing to *top-up* because the loan amount/amortization are the same according to their book.

    • MikeNo Gravatar 07. Jan, 2014 at 2:53 pm #

      Oiler2020 – if you are porting your mortgage and it is insured – there may be a loan to value cap internally. I have had lenders say that they will only go to 90% if the ltv is increasing on port. Each lender is different so this will be a better question for your current mortgage holder.

      As far as CMHC – the percentage charged is always based on the ltv so the fact that your existing ltv is 81% has no bearing on the top up. If they allow you to take the equity out through the transaction – you will still have to pay the full top up premium.

      I trust this helps

  5. Oiler2020No Gravatar 08. Jan, 2014 at 2:05 pm #

    I have checked with CMHC, here’s the formula if only the LTV is increasing:

    LTV Percentage Difference x New House Price x Top-up Premium %

    So I’m better off to ask to increase the loan to a bit larger, do a blending rate and only paying premium on the loan amount difference.

  6. Allan MadanNo Gravatar 15. Jan, 2014 at 1:52 pm #

    I am an accountant from Toronto with many real estate properties and I can certainly say Mortgage rates are on the rise. Canada has seen its highest Interest rates in years and has a thriving real estate market right now here in Toronto. Houses are selling for more and more each day. Lets not also forget the Unites states housing market is also starting to rise making real estate investment especially tricky now a days.

  7. MikeNo Gravatar 16. Jan, 2014 at 8:05 am #

    Hey Allan – thanks for the comment. Successful real estate investment does not depend solely on mortgage interest rates. If you read from some of the most successful real estate investors of the 80′s and 90′s – they were making positive cashflow in a 15-20% rate environment. As an accountant – you will know better than most that the numbers don’t lie. Purchasing property in a growing economic area (such as Edmonton), finding undervalue properties and increasing their value, and maximizing rents through highest and best use will provide a positive cashflow in any interest rate environment. Just make sure the numbers work.