Low Canadian Mortgage Interest Rates – Did we over consume?
Speculation that low interest rates have contributed to a Vancouver housing bubble
The
Organization for Economic Co-operation and Development (OECD) has concluded in a
recent report that Canadians have borrowed more than ever before during the recession of 2008. These record debt levels, according to the OECD have been spurred on by artificially low interest rates implemented to stimulate the economy. It worked, for a time anyway. Vancouver real estate prices dipped sharply during 2008, bringing many nervous buyers in off the sidelines. Vancouver house prices leveled off and promptly shot right back up to pre-recession levels, in many cases exceeding them.
On September 8th 2010, Canada's central bank raised rates 25 basis points increasing the bank prime lending rate from 2.75% to 3.00%. According to the OECD report, 375,000 Canadian homeowners have spread themselves too thin financially and are having to make spending cuts in other areas to keep up with mortgage payments. While the housing market stimulus has been key to helping recover from the recession, many now face a dangerous combination of a hefty debt load and rising interest rates. According to CAAMP (Canadian Association of Accredited Mortgage Professionals), if mortgage interest rates were to climb to 5.25%, 475,000 Canadian mortgage holders would have to cut back spending in other areas to make mortgage payments every month.
The good news is that new mortgage underwriting guidelines were brought into effect on April 19th this year. The two major changes were that the qualifying rate for all mortgages shorter than 5 years was increased to 5.39% and CMHC (
Canada Mortgage Housing Corporation) got rid of high ratio insurance for non-owner occupied properties. This was unpopular with investors and, of course with Vancouvermortgage brokers working with those investors. The result was that unless the subject property was to be owner-occupied or a primary residence', the mortgage required a 20% down payment.
Have low interest rates contributed to a Vancouver real estate bubble? It's a hotly debated topic in local newspapers and internet chat rooms. Some say absolutely yes there's a bubble and it's going to burst, others say no way, this is Vancouver and prices have no where to go but up.
In the meantime, pay down as much of that mortgage debt as you can, build up a nice equity cushion and think long-term. Prices will go up and prices will come down but you have to live somewhere.
Low Canadian Mortgage Interest Rates Did we over consume?
By: Greg Mitchell
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