Ultra-low interest rates attract home buyers

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Record Low Interest Rates, Record-High House Prices

We now have mortgage trends that make it an ideal time to buy your dream home. We have reached ultra-low interest rates. It has never been easier or cheaper to pay off the interest rates on your mortgage. The five year fixed rate mortgage is tempting to first-time home buyers because it is hovering around 3% while variable rates may even offer more savings if you take the risk.

Despite these great trends, on the other end of the spectrum things are not as great. House prices have never really been this high. The average national price is just over $400, 000 making affordability problematic especially since the cost of homes is rising about income. There are calls for a correction of up to 20% yet the market is more vibrant than it ever was!

The trend of buying more house and increasing debt from mortgage is stretching the Canadian household. So keeping these trends in mind and with the sure possibility of rates not falling but, instead, going up, where does that leave the buyer?

The biggest factor that has been driving the increase of real estate prices to an all time high is the longtime downward trend of mortgage rates. Over the past 30 years mortgage interest rates have been dropping significantly. The prime borrowing rate has dropped from 20% to 3% making for attractive borrowing for prospective home buyers.

Since the financial crisis of 2008, the trend has been low and stable interest rates so naturally, many people get the impression that they can afford to carry these record-high debt levels. The worry here is how well Canadians can carry these debt levels when interest rates begin to rise or the economy fails.

A good way to stay safe according to experts is to make sure to do your due diligence and not get in over your head. If people look at their income and don’t overextend themselves, they will protect themselves financially in the long run. They shouldn’t go for it without having built up some sort of emergency fund buffer to handle expenses for six months if not more. Sadly, the reality is that many people can’t go a single paycheck without feeling the squeeze.

What’s happening is that record-low mortgage rates are allowing more people to be able to afford to buy in initially at the lower end of the market. Because of this, house prices have been driven up. More buyers can now afford a home, and bigger homes, meaning that there is more business created for lenders. Of course, eventually interest rates will rise. If you are thinking of borrowing, be wise about it so you can survive a market correction. Household debt has been deemed by The Bank of Canada as the single biggest threat to the Canadian economy. Keep your debt under control. Canadians owe $1.63 for every dollar they earn. If the interest rates rise or the economy weakens, it could have devastating consequences for some homeowners. Don’t fall into the trap. Canada does not provide irresponsible lending, so there shouldn’t be a meltdown like in the United States. One thing is for sure: economists have been saying that housing prices have been overvalues and we could soon see a fall of 10% to 20%.

There is no way of forecasting the interest rate trend. For the foreseeable future, the global economy is fragile and the debt levels are so high for consumers as well as governments so it is likely that we will continue to have such low interest rates.

Trends of First-time Home Buyers

According to Robert McLister, the founder of ratespy.com and editor of canadianmortgagetrends.com, first time home buyers are paying up. They are spending more money on their first home. Average home values have risen an incredible 81% in the last decade. About 300, 000 Canadians become first-time home buyers each year. McLister adds that typically, “first-timers have been purchasing homes that are roughly 11.6% cheaper than the national average. That implies up to a $355,000 price tag for today’s average first-time purchase, much higher than previous reports have estimated. At that price, 10% down and a 2.89% five-year fixed mortgage will get you $1,530 monthly payment.” For the 25-34 year old age bracket of buyers, that is a big obligation that could bring a whole lot of debt if they aren’t prepared!