Gauging the impact of rising interest rates in Hamilton's hot housing market
Is it a real deterrent or a signal to start thinking more carefully about borrowing?
Local housing market watchers don't expect the Bank of Canada's interest rate increase of 0.25 per cent Wednesday to have a big impact in Hamilton's hot market.
But the increase could signal more increases coming, which could pinch homeowners and homebuyers trying to manage not just mortgages but other forms of personal debt.
Mortgage broker Suzanne Boyce at Personal Mortgage Group in Hamilton said the quarter-point increase won't make "that much difference" for someone trying to qualify for a loan to buy a house.
The median price of a home sold in Hamilton in June was $449,900, according to the Realtors Association of Hamilton-Burlington.
The quarter-point increase adds $5 every two weeks for a $100,000 mortgage, she said.
Using rough numbers, with a 20 per cent down payment, someone with a mortgage of roughly $360,000 on that median-priced home could be paying an extra $18 every two weeks, or about $36 a month.
"It's not a huge amount," she said.
But what about someone who is also leveraged with a student loan, a line of credit and is tempted to tap their home's equity to pay for a renovation or vacation? Those forms of debt are also subject to increases.
"That's really where people get hurt, is the debt outside their mortgage," she said.
Interest rates 'one piece of the puzzle'
Cam McCarroll is a real estate broker with the Harbour Team, a local Royal LePage brokerage.
He said he expects a rise in interest rates will get some buyers off the fence who want to get in before the rate rises further.
"It's one piece of the puzzle; it's not the main driver of buyer demand," McCarroll said.
He talked about a "pause" in the market in recent months after listings spiked in May and sales dropped in June.
"People kind of tend to wait to see what will happen," he said. "Everybody just kind of took a pause."
But he said as word gets out of a drop in bidding wars and frenzy, the buyers will come back into the market – coupled with potential further interest rate increases.
"I think it will spur on people to get into the market," he said. "I think we're going to have a really hot fall market."
'If it does go up again, am I prepared?'
Hamilton-based licenced insolvency trustee David Gowling with MNP Debt said the rate increase seems small, but should spark consumers to take a sober look at their debt.
"The other danger is that this could be just one of a series of increases," he said.
He said the rapid rise of housing prices in Hamilton means it's been more and more tempting to take money out of houses' equity to use for other things.
Interest on home-equity lines is often not that much less than a credit card, Gowling said.
"They are under the mistaken impression that by maintaining minimum payments they are fine," he said. "In reality, their expenses are higher than their income, and they are using debt to make up the difference."
'It's that chance to sit down and really think about what does this mean in the long term.' - David Gowling
And if the rates rise so much, in concert with rising prices, that people are unable to qualify for a loan in the first place, that could have a softening effect on prices.
Gowling said the number of people in insolvency has been "generally on the decline" since the last recession, but he's not convinced.
"I don't really think that's a sign that things are better," he said. "They're able to keep things going because of these low interest rates."
For now, with Wednesday's announcement, Gowling and Boyce both said it's not a time to panic.
"It's not really a panic, but it's that chance to sit down and really think about what does this mean in the long term?" he said. "If it does go up again, am I prepared?"
Boyce said she'll be watching to see if the Bank of Canada sticks with its plan or reverses the rate back down.
"There's no issue of urgency today to make up your mind to do anything," she said.
If someone was going to get an adjustable-rate mortgage, the interest rate is immediately higher, but it doesn't necessarily mean it's at the same level as a fixed-rate loan, she said. She said adjustable-rate loans are often pegged at an interest rate lower than the fixed-rate loan.
Plus, borrowers receiving an adjustable-rate loan already have to qualify for the loan as if their payments would be much higher in case of an interest rate increase, Boyce said.