Home Cost and Mortgage Payments

Home prices are on decline and that is excellent news for buyers, but interest rates are on the rise. Is it a good time to buy, and how will that affect your monthly mortgage payments?

Notes:

1. I am a builder not an economist, so I will leave the debate of whether it is good or not for the economy to the economists, banks, and politicians.

2. There are many other factors that are affecting affordability, I did not include all these items to highlight the effect of the interest rate.

I will use this mortgage calculator:

https://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MCCalc-CHCalc-eng.aspx

I will be comparing 5 years fixed mortgages （60 payments） at 2% to 6% interest rates.

This is a story about a guy and his 4 friends buying homes, they have similar incomes, and bought their homes over the span of a year.

2% Interest Rate

The year is 2021, you decided to buy a home, you got some savings, your family pressed themselves and helped with part of the down payment, and you got a 500k mortgage at the fixed rate of 2%

At this interest rate, you have to pay 2,117$ each month, of which 764$ is the interest.

3% Interest Rate

A few months later your first friend decided to buy a house, but the interest rate increased to 3%, so instead of a 500k mortgage, he or she can only qualify for 450k.

At this interest rate, he has to pay 2,129$ each month of which 1,040$ is the interest.

4% Interest Rate

A few months later your second friend decided to buy a house, but the interest rate increased to 4%, so instead of a 500k mortgage, he or she can only qualify for 410k.

At this interest rate, he has to pay 2,156$ each month of which 1,272$ is the interest.

5% Interest Rate

A few months later your third friend decided to buy a house, but the interest rate increased to 5%, so instead of a 500k mortgage, he or she can only qualify for 370k.

At this interest rate, he has to pay 2,151$ each month of which 1,443$ is the interest.

6% Interest Rate

A few months later your fourth least lucky friend decided to buy a house, but the interest rate increased to 6%, so instead of a 500k mortgage, he or she can only qualify for 330k. Not sure why he waited so long

At this interest rate, he has to pay 2,111$ each month of which 1,552$ is the interest.

Conclusion

At 2% the average interest is about 764 monthly for a half-a-million-dollar home.

At 6% the average interest is about 1,552 monthly for 330k dollar home.

Maybe we can see more clearly on what is happening through this simple formular:

Generally,

Good Affordability = stable/higher Buyer Income + stable/lower House Price + stable/lower Interest Rate

Note: There may be some other factors that affect home affordability, but here we just focus the main ones that are impacting the current home market.

On the right side of the equation, when buyer income and house price are stable and unchanged, only the interest rate is rising with an enormous speed, undoubtedly, the affordability on the left side of the equation will be reduced accordingly.

I am a builder. I hope every home buyer can afford a house or a dream house or a better house at any time. However, based on the fact of the fast-rising interest rate and the simple math we just calculated, obviously it’s getting more and more difficult for most people to afford buying houses nowadays, with such an incredibly fast rising interest rate.

Therefore, the more time you wait, the lower affordability you will have on a house even if house price goes down moderately, because the speed of the rising interest rate will not wait for you. If you need a house for living, if you think you can afford a house at this moment, and if you believe the interest rate will not drop in a short time, then just go for it, before you lose it again.