Consequential Impact of Rising Interest Rates; Inflation and Unaffordable Housing.

Mortgages The Driver Behind Most Real Estate Deals Except When It Is Not. 

Consequential Impact of Rising Interest Rates; Inflation and Unaffordable Housing. 

The classical supply demand dynamics are at work in the Toronto GTA (Canadian) economy and it seems no matter what the Bank of Canada tries to do with their drive to increase rates neither demand for housing or employment is being reduced. As neither of these at the basic level are discretionary desires or expenditures, everyone needs a home and a job (business activity, employed doing something productive or of interest, with hopes of earning at least a basic income to sustain themselves) .

Basic theory was that there is a direct relationship between real estate and interest rates, however the reality is, except when there is a shortage of supply. Then the theory doesn’t seem to hold true. There may be a lag effect but that will only put more pressure on increasing housing costs/prices as supply will be further constrained by buyers and builders not wanting to take the risk of building more stock with rising costs and uncertainty. Adding to the dilemma is the long time required to plan, build and deliver a completed housing project. With reduced building activity, price pressures on real estate will only go up. 

Population growth of approximately 1.2 million individuals over the past year pushing the Canadian population over forty million plus for the first time. With stagnant, slow to no significant expansion of the housing stock, the result possibly overlooked by policy makers and planners of our cities and towns is a dramatic shortage. 

A demand-supply imbalance that will take years to correct, with aggressive building, government incentives (tax incentives to build, reduced interest costs or loan guarantees)  and reduction of red-tape at all levels. Importing craftsmen and trades to actually build these residential projects. And then maybe we can achieve an equilibrium that could present affordable housing solutions. It will require building and intensification along established transportation routes.

The escalating interest rates are simply adding to the corrosive nature of inflation, the monster that they are trying to tame. 

Inflation being bad for every saver and worker as it erodes purchasing power however its ironically good for government deficits in the long run (as it does have to pay more for the cost of debt), and maybe this is what Prime Minister Trudeau meant when he dismissively stated “don’t worry, the budget will take care of itself” about budget deficits and government debt.

And surprisingly the government did run a budgetary surplus for the first two months of their fiscal 2023-2024  of $1.5 billion according to the Finance Department.

What do you and I  do with our Home Mortgage with rising rates? 

 Let’s start with a quick illustration that appeared on BNN last month with three examples and the impact of the trend on monthly mortgage payments. (Example Only, rates change, to be discussed with your lender based upon your credit score, employment income, other income).

Mortgage –             Prior to March 2022      After June 7’s Rate Hike    Negotiated Rate

Home/Condo Price:	$ 800,000	$800,000	$800,000
DownPayment *	$80,000	$80,000	$80,000
Mortgage	$ 742,320	$ 742,320	$742,320
Term/ Type / Rate	5 yr Variable 1.55%	5 Yr Variable 6.05%	5 Yr Variable 5.80%
Monthly Payments	$2,968.28	$4,805.49	$4,692.44

* Plus legals, LTT,  closing costs and title insurance (would typically be added here)…

Home Price (Avg)	$1,530,000	$1,530,000	$1,500,000	$1,500,000
Downpayment (35%)*	$ 535,500	$ 535,500	$ 535,000	$535,000
Mortgage Amount (65%)	$ 995,000	$ 995,000	$ 995,000	$ 995,000
3 year Fixed (ex.) Term/Type	5.25%	5.25%	5.25%	5.25%
Amortization	20 years	25 years	30 years	30 years
Payment #/year	52	12	26	12
Payments per period	$1,537.45/ weekly	$ 5,929.38 /monthly	$2,516.91/every 2 wk	$ 5,459.65/ monthly
Total Interest Costs for Term (3 years)	$147,844.27	$ 150,374.85	$ 151,492.20	$151,720.72
Est. Balance, end of Term	$ 903,002.07	$ 931,917.17	$ 950,173.22	$950,173.32

*Plus legals, LTT, closing costs and title insurance (would typically be added here)…

Ultimately it is for you and your lender to determine the best option and payment arrangement for your specific situation, the above is only a sample of what can result given an average property with a three year fixed and negotiated mortgage based upon a hypothetical borrower with qualifying credit and support documents and at the lender’s set mortgage rate, subject to change from time to time. Always quickly changed when the Bank of Canada seems to move on interest rates when increasing them. 

Options that can affect monthly payments:  

Fixed or variable?

One to five years, 25 to 30 years Amortization?

Payment options; Monthly, Bi-montly or semi-monthly, Weekly, for example (payments maybe the same but the results will be different based upon when payments were made, thereby reducing cost of interest on the loan and more being applied to principal reduction over the term of the loan.) 

 What is your goal with this financing? 

Can you make lump-sum payments to reduce this mortgage balance each year, 10-15% ?

Remember to maintain a safety margin, a little reserve balance for the unknown events of life.

Good luck with your mortgage negotiations, remember to run the numbers to see if it all make sense and it is something your household can manage. 

The above discussion and illustrations are fictional for discussion purposes.

Envoy Capitol Realty Inc., Brokerage and our team of associates would love to assist you, your family and your business / corporation with all your real estate needs from residential to investment to commercial.

Email : capitalmoves@gmail.com Toronto Brokerage Line (416) 441-6163