The action is just getting started after the Bank of Canada’s recent interest rate cuts. The Royal Bank of Canada dropped its five-year fixed rate to 2.84 per cent, sparking talks of a mortgage price war. In this episode of the Toronto Housing Market Examiner, we list 5 things that potential home buyers should consider in the wake of this news.
The recent bought of interest rate cuts have stirred a frenzy in the Toronto housing market and people are wondering whether this is the time to jump in. This is a very personal and relevant question for me, because I’m expecting my first child in a few months, and we have to start thinking about a place to raise our family. I’ve put together a list of 5 things that anyone considering buying a house in the Toronto area should consider.
1. Cheaper borrowing costs
Let’s start with the good news. The amount of money from your pocket that goes to the bank will be reduced. Instead, more of that money can go towards paying off the principal balance on the house versus paying interest. So let’s say your monthly payment is $1500. With a lower interest rate, more of that money is going toward the balance on the mortgage, meaning that you will own more of the home at a quicker rate. So in this sense, this is definitely good news for potential home buyers.
2. Beware the Underlying Reason for the Rate Cuts
But before we get too carried away and go on a house-buying binge, let’s ponder the very reason for the Bank of C anada’s rate cut in the first place. These cuts, very unexpected and sudden in nature, were brought on by concerns about the effect of low oil prices on the Canadian economy. We must ask ourselves how this potential economic slowdown might affect our own situation, and subsequently, the housing market in Toronto.
3. Will Slumping Oil Prices Affect Jobs in Ontario?
I’m a firm believer that our housing market must lay on top of a solid foundation of jobs. Jobs that will pay off the mortgages we need to buy a house. So my question is: how will slumping oil prices affect jobs here in Ontario and the Toronto area? There are signs that our economy in Ontario will grow faster than recent powerhouses like Alberta. However, in this very same article, there are concerns about whether our economy will really benefit. You see, lower oil prices have affected the loonie and our exchange rate. This is traditionally seen as good for a manufacturing, export-based economy like Ontario’s. Goods are cheaper to produce here relative to the United States, which will encourage companies to produce goods here. And also, the U.S., which has been our main destination for exports, has a growing economy. This should all be good. Lower oil prices also mean that consumers have more money to spend on other things, which is generally good for the economy. The concern, however, is that changes to our manufacturing capacity take time and don’t happen overnight. This makes sense, because companies traditionally wait and see before making big investment decisions. So bottom line: in the short term, it’s unlikely that things like a lower dollar will spur a big growth in jobs. Take a good read of the article we link to, it provides good perspective.
4. Should You Use Lower Interest Rates to Pay Off Debts Instead?
When interest rates are lower, that’s usually a good time to pay off debts. Many people follow this strategy. However, the big banks have not followed the Bank of Canada in lowering interest rates across the board. This means that things such as auto loans, credit card payments and other consumer-related debts will not really see much of an impact. In fact, while the big banks have started lowering their rates, the decrease has not matched the cut made by the Bank of Canada. If anything, the banks have made a fixed-rate mortgage cheaper, which if anything, encourages potential home-buyers to get off the fence and jump into the housing market.
5. Is Your Job or Occupation Connected with the Oil-Based Economy in Alberta?
You’ll see a common theme in these episodes, with my focus on the fundamentals like the job market. Ask yourself: is your job connected with the oil industry in Alberta? While the high oil prices benefited mainly Alberta, there were still spin-off effects in the rest of Canada. For example, does your company supply oil rigs based out in Alberta? Do you work for a financial company that provides loans to companies based in the oil fields? In a smaller, connected world, jobs are no longer limited by geography, and your job here in the Toronto area may be intimately linked to what’s happening out West. If it is, that is one cause for consideration: is there a risk that you can lose your job in the near to mid-term future? If so, will your ability to make mortgage payments be affected?
Here’s my take on things, and it’s as much for my own benefit as it is for yours. In the midst of the crazy news swirling around out there, let’s keep a firm grasp on the fundamentals, which are the following:
- Do I have enough saved up for a down payment? Or do I have access to funds for a down payment? – I like to be conservative and peg that at 20% of the house price
- Am I confident that I’ll be able to make all my mortgage payments for the foreseeable future? This means: am I confident that I’ll be in a secure job, or have enough income from my business, to afford the regular amounts?
- Based on those two amounts, what truly can I afford?
That last part is important to me: if I start with what I want, I can easily get carried away and see my budget grow beyond my means. Let’s start with a firm figure in mind and go from there. In these heady times, we must be disciplined. And that’s my take for this week.