Brokers may be compelled to advise clients to opt for a smaller mortgage, following a warning that homeowners may be ill-prepared to handle impending interest rate hikes.
"An improving economy increases the prospect of a hike in interest rates, and it could come sooner than many think. An increase in the overnight lending rate will have an impact not just on mortgages, but also savings and debt," Bob Aggarwal , president of Canadalend.com said in a statement Friday. "Unfortunately, many homeowners or potential homeowners have become accustomed to the near-record-low interest rate environment and are not prepared for a rate hike and how it will impact their day-to-day life."
In light of this, brokers may have clients best interests at heart if they advise first-time homebuyers to avoid locking in to a larger mortgage than is necessary.
"While some real estate agents will tell potential home buyers to get the biggest place their pre-approved mortgage will allow, the fact remains that interest rates will tick higher over the coming years, and those who maxed out their mortgages will be faced a sizeable interest rate increase when they renew their mortgage,” Aggerwal said. “That translates into a higher mortgage payments and lower savings."
While it remains to be seen when interest rates will climb, Canada’s improving economy may influence a hike sooner rather than later.
“While the lending rate is not expected to increase until the economy improves, the fact remains that it will eventually tick higher, and the increase could catch homeowners off guard, the report stated. “During the third quarter, Canada’s gross domestic product grew at an annualized pace of 2.7%, the largest gain since the third quarter of 2011.”
Canadalend.com also touched on the unaffordability gap, which continues to increase as income struggles to keep up with average house prices in Canada.
“Back in 1997, the average home price in Canada was $154,620, or about 4.9 times the average pre-tax annual full-time income of $31,484,” the report stated. “Through the first seven months of 2013, the average price of a home in Canada was $379,725, or roughly 7.8 times the average full-time income of $48,497.”