If there is anything that 2020 has been good for (and there has to be something, right?), it’s how it forced us to stop our daily routines. We have heard from many people that the changes from this year made them re-evaluate how they were spending their time, how they work and even how they live their lives.

We often get so focused on our specific circumstances and the nitty-gritty details of our lives that we don’t look at things from a bigger picture.  It took a global pandemic for us to take a step back from the tree to see the forest, but it happened.

As a result, many homeowners (or prospective homeowners) have reconsidered whether real estate in urban centres are worth the huge price premium over more rural properties.

We wrote about where the bargains are if you want to move out of the city in this article back in October so we won’t revisit it just yet.

Instead, let’s take a look at how the rise of unbelievably cheap money – in the form of historically low mortgage rates – has impacted affordability, repayment and in turn, real estate prices.

Mortgage rates haven’t always been this low and many of us can remember a time when mortgage rates were double, triple, even quadruple the rates they are right now.  We all know that higher rates impacts how much we can afford and how much of our monthly payment goes to building equity in the home, but we think you’ll be stunned at the differences.

Let’s take a quick look at historic rates over the past 50 years and then we’ll do some simple math on how ever percent increase in rates affects the principal you’re able to pay down and how it lowers your qualifying budget.

Here’s Your History Lesson

When we look at historic mortgage rates, we’re handicapped by the fact that posted rates are not the actual, discounted rates that lenders actually charge borrowers.   The Canadian Association of Accredited Mortgage Professionals estimates that the average discount applied to a 5 year mortgage rate was 1.42%.  While that estimate won’t be accurate for all of the past fifty years, it at least gives us the ability to look at what actual, discounted rates would have been at our key dates.

Here’s what the posted rate looked like at 10-year milestones in the past 50 years.

Posted Mortgage Rate (5 Year, Fixed)

From the low rates of the start of the 70s to the peak of our interest rates in the 80s, mortgage rates have fluctuated widely in the past fifty years.

As the Globe and Mail reports:

Five-year fixed-rate mortgages were more than 15 per cent for about two years, from the fall of 1980 to the fall of 1982, peaking at just over 21 per cent in the second half of 1981. The Bank of Canada was cranking up its rates at the time, to try to stem the runaway inflation that was playing havoc with the Canadian economy.  Home buyers had to endure relatively high rates for much longer than just that stretch. Five-year fixed mortgage rates never fell below ten per cent for a full 18 years – from 1973 to 1991.

Let’s look at how these mortgage rates impacted payments.

2020 Mortgage Rate of 5.19%

  • $592 monthly for every $100,000
  • 25 years amortization period, paid monthly
  • Total payments over term of $35,548
  • Interest paid of $24,312
  • Principal paid of $11,325
  • Balance at end of term of $88,764

2010 Mortgage Rate of 5.49%

  • $609 monthly for every $100,000
  • 25 years amortization period, paid monthly
  • Total payments over term of $36,588
  • Interest paid of $25,756
  • Principal paid of $10,831
  • Balance at end of term of $89,168

2000 Mortgage Rate of 8.25%

  • $779 monthly for every $100,000
  • 25 years amortization period, paid monthly
  • Total payments over term of $46,753
  • Interest paid of $39,132
  • Principal paid of $7,621
  • Balance at end of term of $92,378

1990 Mortgage Rate of 12.00%

  • $1,032 monthly for every $100,000
  • 25 years amortization period, paid monthly
  • Total payments over term of $61,914
  • Interest paid of $57,374
  • Principal paid of $4,540
  • Balance at end of term of $95,460

1980 Mortgage Rate of 13.25%

  • $1,120 monthly for every $100,000
  • 25 years amortization period, paid monthly
  • Total payments over term of $67,211
  • Interest paid of $63,388
  • Principal paid of $3,823
  • Balance at end of term of $96,176

1970 Mortgage Rate of 4.79%

  • $569 monthly for every $100,000
  • 25 years amortization period, paid monthly
  • Total payments over term of $34,182
  • Interest paid of $22,390
  • Principal paid of $11,792
  • Balance at end of term of $88,207

From a low of $569 per month (for $100K mortgage) to a high of $1,120, we see the cost almost doubling, while principal repayment goes from a high of almost 1/3 of the payments made to less than 5%.  Make no mistake, even small changes in mortgage rates have a big impact on the cost and principal repayment amount.

Impact of Change

The below chart shows the dramatic impact a one percent increase has on your mortgage.  As above, the numbers below are per each $100,000 mortgage, at a five-year fixed rate with a 25-year amortization period.

Rate Monthly Paid Interest Principal Owing
1.74% $411 $24,660 $7,966 $16,694 $83,305
2.74% $460 $27,600 $12,641 $14,958 $85,041
3.74% $512 $30,721 $17,373 $13,347 $86,652
4.74% $566 $34,013 $22,150 $11,862 $88,137
5.74% $624 $37,465 $26,962 $10,503 $89,496

The above chart shows the dramatic impact that the interest rate has on how much you pay – and how much of that payment goes towards principal.

At a widely available (as of December 11, 2020) mortgage rate of 1.74%, you pay only $411.00 per $100K of mortgage and 68% of your monthly payment is in fact principal repayment.

While each percent increase in rate pushes your monthly payment up, it is what it does to your principal repayment that most people don’t understand.  By the time the mortgage rate is up 2%, the monthly cost for the $100K mortgage is only up about $100.00 dollars, but your principal repayment has dropped from 68% of your monthly payment to 43%.

When we look at the history of mortgage rates in Canada and the impact that rate changes have on the cost and repayment of the mortgage amount, it’s clear that the current unbelievably low interest rates has impacted buyer thinking.  When it costs so little to borrow money, the opportunity cost of not being in the real estate market is huge – and that pushes more people into the market, which pushes prices up.

If you want to discuss how to get into the market or move up the market, don’t hesitate to get in touch.