Confidence is Key
This week I want to dissect some of the recent headlines in the news and talk about how they actually apply to a typical mortgage borrower. We’re almost halfway through 2013 and 5 years since the beginning of the housing downturn in 2008 and we have a headline that recently stated we could be “facing a 5-year housing slump”. Rather than worrying about it or worse, shrugging it off, I think it’s important to understand how it impacts your situation specifically. Short of talking to an experienced Mortgage Professional about your personal financial profile and current mortgage position, this article should at least provide some insight on how recent mortgage market developments will affect your current mortgage and opportunity for future borrowings.
Headline: More new mortgage rules
Yes you read that correctly, there are now additional mortgage rule changes. The most recent additions take place behind the scenes in your mortgage application as they mostly apply to how your qualifying ratios are calculated which affects the maximum mortgage amount you can be approved for. The implementation of different minimum payment amounts for revolving debts such as credit cards and lines of credit, stricter rental income confirmation requirements and how child support or alimony the borrower pays is calculated are all aimed at preventing Canadians from taking on more debt than they can manage.
Even with these new rule announcements, low mortgage interest rates are still propelling affordability. Rather than being reactive if a sharp housing downturn happens, these new rules would be viewed as being proactive by protecting Canadians in the event their financial profile faces a negative impact. Some examples would be a job loss, interest rate hike or property values decline. These types of scenarios can be much more difficult to endure when you have high personal debt payments, a mortgage payment as well as all other costs that come with owning a home. Think of the new rules as a buffer ensuring you are obtaining a mortgage that is affordable now and in the future even if you are carrying personal debt like most of us do, your income declines or when rates rise which they most certainly will.
Headline: Rate hikes are coming
We’ve been hearing that for 3 years now. We know rates are going to go up, it’s inevitable. What we don’t know is when, by how much, or how fast they’ll go up. It’s important to understand that low mortgage interest rates can affect other areas of our economy negatively, namely pensions and insurance companies. It’s not just the mortgage and housing market being impacted when it comes to low rates. I believe the reason for the repeated rate hike warning is so Canadians do not become dependent on low interest rates as they will go up, eventually.
Interest rates have gone up and down slightly for a while. In fact, our average interest rate was lower in April 2013 than it was in April 2012, so what does that tell you? It indicates like the weather, no one can predict it with certainty. All you can do is prepare yourself for the event that rates rise by reducing your personal debt levels, saving a cash cushion for emergencies and reducing your mortgage principal. Just a heads up, the latest rate prediction is we will see a mentionable rise in mid-2014. We’ll have to wait and see.
Headline: Housing market facing a 5-year slump
This one is a pretty ambiguous because it’s a broad stroked statement. Let’s break it down a bit. In the housing market there are 2 distinct areas of impact, home sales and home prices. Stats are showing that home sales are down, but prices are still near or at an all time high in some cities. This means that house prices are still high but inventory is not moving as fast as it used to. Of course, everyone needs shelter, so homes are always going to be in demand. What is a cause for concern is the domino effect a tempered housing market could have on other areas of our economy. If there are fewer houses being sold, then there are fewer new houses being built, which means there could be less employment opportunities in the housing sector, which could lead to a lack of consumer confidence. If a borrower thinks they might lose their job, they will likely not be as eager to get into the real estate market, which could mean less buyers and an influx of sellers. When there’s more supply than demand, home prices could dip, coupled with already low home sales you can see where the housing slump prediction might be coming from.
Everyone needs a place to live, so it’s never of a question of the housing market completely collapsing. What does require further inquiry is the growth of the market. If the market is not growing, it can either be termed stagnant or stable, depending on how you see things. In my opinion, this type of housing market encourages long term home ownership, instead of promoting short term real estate flipping. So don’t fret, just be prepared with a back-up plan if you’re on a tight timeline to either buy, sell or build your home. An alternative provides a slight buffer between you and housing market fluctuations that might otherwise affect you adversely.
Moral of the story is you can’t believe everything you read. Understand, apply and quantify it before you lose sleep worrying about the potential impact it may have on you. Confidence is key when it comes to home ownership. Talk to trusted, experienced professionals in their field about both the short term and long term home ownership goals you have. Explore your options until you feel confident that you have found a custom solution for your needs. If you can find a home and mortgage that helps you achieve your goals, the less you have to worry about how new mortgage rules, higher rates and housing market inconsistencies.