Interest rates are still climbing.  For every 1/4% rise in rates, the cost to borrow on a mortgage just grew by $15.00 per month.  And even after paying an extra $15.00 per month, the principal balance is $4.00 more than at the lower rate.  In other words, for every 1/4% hike in the rate, you would have to make payments that are $19.00 per month higher just to maintain the same balance.
Has the escalation stopped?  This writer thinks not.  As in my article of three weeks ago, I feel rates may go up 2% over the next twelve months.  If they do reach that level, it means that the normal mortgagor ($100,000) will have payments of $120 more per month than one month ago.  You must hurry to catch a rate that is still in the sixes (ie. 6.80% for five years).
What a higher rate can do to pre-approvals.
Janet & Ernie had a rate locked in at 6.2% for five years with one of the major banks.  They had calculated their cashflow based on those payments.  It was going to be tight for a while, but having their own home gave them the incentive to struggle.  The bank was generous and offered to hold the rate for 120 days.  Their dream home was being built by what they were told was a reputable builder in a new subdivision.  At the onset, they were told that the subdivision had not yet been registered but that was indeed normal.  The closing date on the offer to purchase was September 30, 1998, that being the date of expiry of the mortgage commitment.  The house just had to be built by then!
They have been visiting their site (lot) with anticipation every weekend since they signed the papers.  Every week they saw the same bush on their lot; no footings, no foundations, no framing, just dirt & trees.  Every Monday they called the builder's agent to find out what was happening, only to be told that the house would indeed be built.  They visited the Township Office (who issues the building permits) and are told that the builder has yet to pay a security deposit.  No security deposit, no building permit.  They relay that information to the builder's agent.  "It will be built!"
Here we are at the beginning of September.  The lot has been cleared but no building yet.  It is impossible to build & close in a month.  We apply to the Lender to give us an extension, but since the rates have gone up, and through no fault of the lender, it would have been unreasonable to assume the lender would extend the commitment beyond September 30th.  To make matters worse, now that the best rate is at 6.80%, our couple no longer qualifies to buy that particular house, nor could they afford the extra payments.  Next week we'll look at solutions for this case.
Yet another example sees Mary, whose mortgage comes due at the end of February 1999, calling real estate agents to sell her house before she loses it.  With rates in the low 6% range (last month), the single mom saw herself being able to support the matrimonial house, even though her husband no longer lives there.  The arrangement between Mary & her estranged husband was that she would support the house on her own and as long as she maintained the payments, he would not go after what little equity remained in the house.  He would stay on title until the renewal date; she would then apply for a new mortgage in her name only.  With an income of only $24,000 per year, she would barely qualify for the remaining $60,000 mortgage (at 6.20%).  Now that rates have escalated, and we can only get 120 day rate guarantees, her rate of interest is a question mark.  Even if we could secure today's rate (6.80%), she would only qualify for $56,000 instead of the $60,000 she needs.  Even if she were able to sell (value around $70,000), she would have but $10,000 to apply as down payment, closing costs, and moving expenses.  What could she buy?  No much I'm afraid!  We will discuss solutions next week.
The repercussions from this latest rate hike will have an enormous impact on many home buyers and home owners.  Those Consumers who are thinking of buying soon, should do so without haste. Those of you who have bought within the last couple of years and who chose short term mortgages should indeed seek advice on locking in for longer terms (ie. 3 or 5 years, or longer). Those who bought when the rates were rock bottom (5.95%, five year term) should revel in their good fortune that they chose long term mortgages.  Perhaps in another three or four years the rates will have had a chance to come back down.