Aston Lau

Should you be worried about rising mortgage rates?

A lot of my friends are buying right now. I have two married friends who bought in 2008 at pretty much the peak of the cycle; another friend paid close to $425,000 (the maximum you can purchase as a first-time buyer if you want to take advantage of the Property Transfer Tax exemption) for a 4-bedroom bungalow in the Gorge area back in May.

I have a pretty good idea of what was going through their minds: “If I don’t get in the market now while rates are low, I’ll never get in!” I completely understand because I have those fears myself; what if interest rates go up, and prices don’t come down further? What if the Realtors® are right, and I’m priced out of the market forever??

From a completely rational point of view, though, that likely won’t happen. If rates go up, affordability erodes, meaning consumers can’t buy as much as they used to, which will drive prices down. Most of us as homebuyers (and first-time buyers in particular) already have to leverage ourselves to the hilt if we want to buy a $400,000 property (and if you’re single or your family lives on one income, you’re already priced out). Affordability has already reached its breaking point.

These historically low interest rates that we’re currently seeing is keeping the housing bubble inflated for just a little bit longer — and luring in more first-time buyers in the process. With interest rates having nowhere to go but up, however, I am doubtful that it will end well for my friends. Best case scenario, we will be the generation that spends our entire lives paying off half a million in mortgage debt; worst case scenario, my friends will end up underwater on their mortgages, and won’t be able to afford to keep their homes when they have to renew their fixed rate mortgages 5 years from now at double the interest rate. As I mentioned in my last post, it’s better to borrow $450,000 @ 7% interest rate, as opposed to $600,000 @ today’s 4% interest rates, even though the monthly payments are exactly the same — because you know interest rates have nowhere to go but up from 4%. Better to wait until prices are low and pay a higher rate, than be stuck with a huge mortgage over 25-35 years of fluctuating rates.

Even if I am completely wrong about this and prices don’t fall, but fixed rates creep back up to 6%, I’m not too worried — there are always variable rate mortgages.  As the prime rate goes higher, we should start seeing larger prime-minus rates again. Back in 2005 when prime was 4.25%, I was offered a prime-0.8% mortgage, for a rate of 3.45%. That’s comparable to any 5-year fixed rate that I can get today. (And had I taken that prime-0.8% rate back then, I’d be paying 1.45% on my mortgage right now! Sometimes I wonder if I shouldn’t have just jumped into the condo market back in 2005 instead of sitting on the sidelines Edit: I’ve since found out that the condo I almost purchased in 2005 required remediation.  I probably dodged a bullet on that one.)