The Impact of Rising Mortgage Rates

In one of our first posts, we looked at the impact that interest rates have had on the rise of Toronto house prices.  Not surprisingly, the record low interest rates Canadians have enjoyed over the past few years increased peoples purchasing power by lowering monthly mortgage payments.  With rates definitively on the rise, we wanted to explore the real dollars impact this is having on affordability for potential home buyers.

To do this, will we leverage the average home price in the Greater Toronto Area for September, being $796,786.  The first table below shows how much a monthly mortgage payment would be for a new buyer assuming they put down 20%, leaving a mortgage balance of $637,429.  For this mortgage total, we examine payments for all mortgage rates from 2.5% to 4.5%, increasing by .25% for a 25 year term.

Mortgage

Mortgage Rate Monthly Payment Payment Increase from 2.5%
$ Amount

% Increase

$637,429

2.5%

$2,855.47 $0

0%

2.75%

$2,935.43 $79.96 3%
3% $3,016.60 $161.13

6%

3.25%

$3,098.96 $243.49 9%
3.5% $3,182.49 $327.02

11%

3.75%

$3,267.18 $411.71

14%

4%

$3,353.01 $497.54

17%

4.25%

$3,439.95 $584.48

20%

4.5%

$3,528.00 $672.53

24%

The table shows that for the roughly $637,000 mortgage, the monthly payment when the mortgage rate is only 2.5% is just $2,855.47.  This amount increases by $327 to $3,182.49 when the mortgage rate is increased just 1 point to 3.5%.  As the rate climbs 2 points to 4.5%, the payment increases by $672 to a monthly payment of $3,528.  This new amount represents a monthly expense 24% higher than the record low rates that buyers were previously able to get.

The second chart focuses on the mortgage purchasing power that a $2,855.47 monthly payment can afford a new buyer depending on the rate obtained.

Monthly Payment

Mortgage Rate Mortgage Total Purchasing Power from 2.5%
$ Amount

% Decrease

$2,855.47

2.5%

$637,429 $0

0%

2.75%

$620,065 -$17,364

3%

3%

$603,380 -$34,049

5%

3.25%

$587,345 -$50,084

8%

3.5%

$571,928 -$65,501

10%

3.75%

$557,104 -$80,325

13%

4%

$542,845 -$94,584

15%

4.25%

$529,124 -$108,305

17%

4.5%

$515,918 -$121,511

19%

At 2.5%, approval for a monthly payment of $2,855.47 is sufficient for a buyer to afford the mortgage (assuming 20% down payment) for the average GTA home in September. However, as the mortgage rate rises, the total mortgage the buyer would be able to gain approval for quickly drops.  With just a 1-point rise, the individual has already lost $65,501 from their total mortgage.  As the rate increase continues to 4.5%, the buyer has lost $121,511 in purchasing power.  This is a total 19% lower than what a mortgage rate of 2.5% could have afforded them.

The much anticipated steady growth in the Bank of Canada’s interest rate has become very real and is already having an impact on the housing sector.  As these increases continue over the coming quarters, it will be interesting to see how the housing market and home prices react.

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