I Am Buying A Home…what If The Mortgage Rates Rise While I Am In The Process?
As exciting as looking for a new home may be for most Canadians, the next best thing is ensuring to get the best rate for their mortgage needs without having to worry about rate increases. However what can happen if rates increase while in the process of searching for your dream home?
Well if rates decrease, consider yourself lucky. On the flipside if rates increase, and our mortgage agent has previously advised you that you barely qualified for your mortgage, it will tend to be more difficult to get the home you originally had your heart set on.
One of the many reasons our agents here at Noble Mortgages do a pre-approval is so that you get your rates locked in for reasons such as what we will be discussing.
Let’s have a look at two different cases and see what happens in each, if the mortgage rates were to increase.
Case # 1: Purchasing a mortgage without pre-approval
Let’s say, you buy a home for $625K and your down payment (DP) is (20%) $125K, your 5 year fixed-rate is 2.84% amortized at 25 years which using our mortgage calculator works out to $2,325/month. Now if you were to hold off on purchasing the home and rates do rise to let’s say 3.34% your monthly payment will then be $ 2,454.
Although it is very difficult to conclude that rates will change, some foresee that rates will be rising. Since pre-approvals are free of charge and an easy process, you really don’t have nothing to lose by locking in your rate because it’s only a pre-approval and you will not be stuck with it.
Case # 2: Pre-approval on a variable mortgage rate
After being pre-approved on a variable rate mortgage remember the rate is not guaranteed, if there’s an increase in the prime rate. The only guarantee is the discount to the prime rate, if your lender reduces the discount to all their clients.
Let’s have a look at this example in more detail. How much more you will have to pay if prime rate goes up in the middle of you buying a home. Let’s say today’s prime rate is 3.2%. If the discount is prime rate – 0.45%, your rate will be 2.75% (3.2% – 0.45%) We have used the same purchase and DP as in case #1 giving you a monthly mortgage payment of $2,303.
Now let’s look at another example if prime rate rises to 3.7%, the discount will drop to prime -0.15%, and as you have been pre-approved, you will still get the discount of prime-0.45%. In this case, your rate is 3.25% (3.7%-0.45%) and your monthly mortgage payment would be $2,431.00.
It’s unfortunate that if the prime rate rises there is nothing you can do with a variable rate mortgage, but since you were pre-approved you will save some money because the discount has dropped to prime -0.15%. However, if you opted out of having a pre-approval done you’re looking at a rate of 3.55% (3.7%-0.15%) and the monthly payment you would be looking at will be $2,150.
RE-CAP- If you are thinking of buying a home and the rates do rise, ensure that you get pre-approved. This will protect you from the increase if a fixed rate is what you are looking for. Now for a variable rate, it may not protect you from the rates, it will however allow you to keep the discount to prime should your lender reduce the discount.
If you’re looking to get a pre-approval, look no further than your friendly neighbour in Woodbridge. We have a variety of Mortgage agents ready to help you. Noble Mortgages Agents’ always put your best interests first and foremost.