Latest Interest Rate Hike Has A Silver Lining For 1st-Time Homebuyers
With the news last week that the Bank of Canada increased its prime rate for the third time this year by 0.25 points to 1.75, many homeowners are wondering how this will impact house prices. Will this just slow down price growth, or cause a significant drop in what is still a hot housing market.
When trying to predict how the prime rate relates to home prices, it’s very important to consider the historical data. Even after the increases this year, the prime rate is still incredibly low historically, making the cost of borrowing lower than at almost any other point in the last century. I find many homeowners have recency bias and are focused more on how interest rates compare to last year than how low they have been historically.
This leads to the impression that any increase in mortgage rates means the market will crash, even though this likely won’t be the case.
Opportunity to invest
When you look at the high percentage of every mortgage payment that goes to pay down the principal, real estate remains an excellent investment. This isn’t the early 1980s when interest rates crested 20 per cent. With rates that high, almost all of a mortgage payment would go towards paying interest, making it difficult to build up equity. With current mortgage rates, the majority of every mortgage payment goes towards the principal, which builds up equity, creating security for homeowners by reducing the amount they owe and also allowing them an opportunity to invest their gains.