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.