In case you missed it, the Canadian government increased the policy interest rate yet again to 1.5 per cent.
If you are wondering why, here’s the reason.
The inflation rate in Canada has been on the rise. Many people across all provinces in Canada can attest that their favourite grocery and household items now cost a bit more than they did a couple of months ago due to inflation.
One of the ways the Canadian government is trying to keep things in check and bring back some form of normalcy is by increasing interest rates. This economic policy of quantitative tightening aims to curtail excessive spending and money circulation and, in turn, combat inflation.
However, with interest rates increasing, Canadians are facing the heat of higher lending costs. Lending rates pegged to the policy rate, such as variable mortgage rates, line of credits, or other variable rates, are increasing and are expected to continue on this path.
More recently, fixed mortgage rates are also beginning to reflect the increase in policy rates and the current state of the economy. Two years ago, a 5-year fixed mortgage for 25 years was as low as 2.34%. In 2022 similar mortgage agreements are seeing rates as high as 4.94%.
Higher mortgage rates aren’t the only housing financial struggles that the average Canadian is facing. The real estate industry has been buzzing with everyone talking about the substantial increases in the prices of residential homes.
It’s no news that house prices in British Columbia have been exceptionally high. Home ownership has been accessible to only a few residents. The current increase in house prices has exacerbated the inaccessibility of home ownership.
Most people who hoped to purchase homes are discouraged by higher home prices and increasing mortgage rates. The decision to buy a house or keep renting has become even more difficult.
Should you buy a home, or should you keep renting?
Suppose you have crossed the hurdle of saving up the down payment for a home purchase. Higher housing prices and mortgage rates mean two important things.
The price of the home you initially wanted to purchase may have gone up, and so would the required down payment. Also, closing on a house would cost you more in terms of interest rate payments than it would have a year ago. Essentially, more money is leaving your pockets for the same house.
Additionally, you need to consider the stress test. The stress test is one aspect of buying a house that most people tend to sideline. With higher interest rates, many Canadians would be qualified for homes with lower values.
What this means is that, given your income level, if you would have qualified to purchase a home of about $500,000, higher policy interest rates will result in you qualifying for a lower valued house, say at $350,000.
The circumstances around higher home prices and increasing interest rates almost force you to ditch the idea of purchasing a home. Buying a home means you would need a higher down payment and also pay higher interest rates.
While the decision to keep renting may seem like the more feasible choice, the question remains — would rental costs stay the same?
With the increasing inflation rates, landlords may gear towards increasing rents. In fact, the average cost of renting a one-bedroom unit in Vancouver has increased by 18.12% year-over-year to $2,334 as of May 2022.
The uncertainty between rising house rents and being able to afford to purchase a home is a looming one.
On the one hand, home ownership allows you to build equity in a real estate property, but you are constrained by higher home prices and caught up with higher mortgage interest payments.
On the other hand, while renting may be the more feasible option, you can only hope that landlords do not continue to increase rents substantially.
In the end, as the name suggests, the personal finance decision to buy a house or keep renting is personal. Owning a home comes with additional financial responsibilities such as home maintenance, property taxes, and house insurance, amongst others. If renting is a cheaper option for you, then, by all means, choose the best option for your financial situation.
