In the wake of three interest rate hikes this year by the Bank of Canada, many Canadians have been hit with the reality that rates can, indeed, rise. This was the first move upward in the cost of borrowing in seven years. So naturally, there are many homeowners who have never faced a rising rate environment, let alone a single rate hike.
Why did rates rise?
The Government of Canada raised the overnight rates because economic reports showed stronger than expected indicators of growth. These indicators included high employment and income growth, and robust consumer spending.
To rent or buy, that is the question.
This is a hot topic in B.C., and especially in the Lower Mainland, where we’ve seen significant increases in home prices over the last 20 years. Home ownership isn’t necessarily a surefire way to fund retirement or to build wealth. Just because it’s been a good investment in the past, there are no guarantees that similar increases will repeat.
In this constantly evolving environment, it’s important that you consider the tradeoffs between renting and home ownership.
If you want to become a homeowner in the next few years, you’re not alone. The home ownership rate is greater than 70 percent in British Columbia, and four in five Canadian households that bought a home between 2006 and 2011 had a mortgage.
Home ownership comes with a concentration of wealth, but also comes with expenses that renters avoid. Things like like home insurance and property taxes. The costs of home maintenance and upkeep can cause strain on both finances and your well-being, especially when they are large and unanticipated.
Renting and saving can be a viable long-term alternative. The key to this approach is a disciplined savings and investment plan to ensure that you’re able to create the right amount of wealth for both your long- and short-term needs.
Should I be worried?
With the possibility of another rate increase still on the horizon, now is a good time to determine how much variability you can tolerate. That is, can you still afford your home if interest rates go up?
If you’re right on the border of being able to afford your mortgage payment, locking in an affordable payment plan for five years, like a fixed rate mortgage, may be a safe bet. After all, five years is a long time in the current geopolitical environment. World events can have significant and unintended impacts on both the Canadian economy and interest rates.
If you have the flexibility to weather fluctuating interest rates, you may want to explore a variable rate mortgage.
How we can help.
A great step to help determine your financial resilience is to have a Where You’re At Money Chat with a member of our investment team. We know that money matters aren’t always comfortable to talk about. We make it easy by breaking it down to the Four Money Basics – Manage, Save, Grow, and Protect. We’ll ask you a few simple questions to find out where you’re at with your money. From there we’ll pick one of the Basics to focus on. You’ll be able to use insights from this chat to help determine the type of mortgage that will best suit your unique situation and needs.
|Daryl Hosein, Vice President, Treasury
As both a Chartered Accountant and CFA charter holder, you could say that Daryl loves crunching numbers. He recently joined Coast Capital from warm and sunny Barbados and has been enjoying the great Vancouver area weather…so far. When he’s not at work, Daryl is fine-tuning his guitar skills to keep up with his three musically-inclined daughters.