Saturday, September 5, 2009

Interest Rates 2

Yesterday we posted a graph of prime Interest rates since 1975. What stands out most is how low rates are now in comparision to the last 39 years.

But the stark contrast goes back even further than that. Here is a link to 5-year mortgage rates since 1951 (click here).

Even going back as far as 1951, you will not see rates as low as they are today.

From 1951 - 1959, the August 5-year mortgage rate fluctuated from 5.62 - 6.75%.

From 1960 - 1969, the 5-year mortgage rate fluctuated from 7.15 - 9.99%.

From 1970 - 1975, the rate varied from 10.49 - 11.83%.

And, as yesterday's chart shows, rates took off from there to 15% and higher (21.5%).

The 5-year average bank mortgage rate has NEVER been below 5% over the course of the past 60 years. Never, that is, until now.

Today you can get a 5-year rate for a stunning 3.79%.

And because of that, Canadians are being sold an image that real estate has entered an age of 'affordability'.

But how long will that age last? If it doesn't last for the next 35 years, anyone assuming a large mortgage today is walking into a trap.


A $580,000 home with a $30,000 downpayment (which is 5% down) results in a $550,000 mortgage. At 3.7% the monthly payment (including property taxes) is going to be $2,910.21.

In the Lower Mainland thousands of Canadians are jumping into this exact situation right now.

If rates go up just 1%, the monthly payment jumps to $3,244.37. If rates go 2%, the monthly payment jumps to $3,598.95, almost $700 per month more.

How many people can afford an increase of $700 per month in their mortgage payments?

And that's for a measly 2% jump in rates!

A colleague tells me that - just this morning - she heard a mortgage broker on a radio broadcast predicting that rates will rise to at least 8% in the near future.

At 8% our $550,000 mortgage will require a monthly payment of $4,479.35, almost $1,700 per month more than today.

Personally we foresee a return to 1970s rates of 12% and higher (for those keeping score that's $6,158.44 per month in payments).

The only way those who have assumed a large mortgage over the past four years can survive is if mortgage rates are kept artificially low for the next 35 years.

The wiff of the cheese is enticing.

But when the trap snaps shut, the mouse doesn't get to walk away with the prize.

Can you see what will happen after the trap snaps shut?


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