What can brokers do to prepare clients for rate hikes?

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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.”

  • Ron Butler on 2013-12-09 9:34:37 AM

    I used to think I was smart enough to predict the future of rates and housing prices. Eventually I realized I was wrong most of the time. I think that it's a dangerous thing to TELL the applicant that rates WILL be higher soon and they need to buy less house. I personally think it may all be true but as I said I have been wrong far more often than right about interest rates and markets.

    If you gave that same rate increase warning in 2010 you would have done your clients a disservice.

    I think it's best to caution the client and show them what higher rates look like in terms of payment shock but I really don't believe in telling the clients what to do.

    I can't see the future of the clients lives either. If they buy less house and then both get big promotions and have 2 kids and end up in a too small house I did them a disservice, they would have been better off taking the biggest house they could afford because we all know the transaction costs of selling and buying in a short time frame like 2 or 3 years should be avoided.

    If the clients lose their jobs or their marriage ends, well, a smaller house would not really be the fix they need either.

    My thought process in this is to be an honest merchant/broker, not pretend to be a rate or market predictor. Give great rates, rational cautions and fast service and leave the future to the tea readers.

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