The era of record-low mortgage prices is coming to an end.
Mortgage rates, which are determined by a bank’s funding costs in the bond market, have started to climb from the historic lows seen in the past two years, where offers of 2.99 per cent prevailed. The five-year fixed-rate mortgage market, which is based on a 5-year bond yield plus a margin built in by the lenders, is the first to show signs of upward pressure.
While posted rates – those advertised publicly by the banks – haven’t changed much, the special discounted rates offered by lenders inside branches are now moving upward. This means the cost of home ownership will rise, which could put pressure on real estate demand.
“The recent increase in mortgage rates is likely to lead to a deterioration in affordability, at least when evaluated at the five-year fixed rate,” said Derek Burleton, deputy chief economist at Toronto-Dominion Bank in a research note. “However, affordability is still likely to remain decent from a historical perspective.” Mr. Burleton said home buyers who take out a five-year fixed rate mortgage with a 25-year amortization on an average-priced home will likely see a $130 increase in monthly payments compared to May, when rates were at their lowest.
“The potential increase in mortgage rates over the next few years will likely mean that households will have to devote a percentage point more of their income to debt interest costs,” Mr. Burleton said.
Although this isn't good for potential buyers. Realistically, Home buyers may have to look at second owned homes closer than new home construction.