According to BMO’s First-Time Home Buyer’s Report, one-third of first-time buyers (31 per cent) expect interest rates to stay the same over the next five years. However, these first-time buyers may need to reconsider their outlook.
BMO Economics projects the Bank of Canada will raise its overnight lending rate in the second half of 2014.
“The Bank of Canada has made no changes to its policy bias,” said Doug Porter, Chief Economist, BMO Capital Markets. “With Canadians’ debt-to-income ratio poised to stabilize in the months ahead and the housing sector cooling, we continue to look for a rate hike during the second half of 2014. Even so, other interest rates, such as longer-term mortgage rates, can rise well ahead of the Bank of Canada.”
Frances Hinojosa, Mortgage Expert, BMO Bank of Montreal, noted that the current projections indicate the cost of borrowing to own a home will gradually increase, and buyers should take note when planning their purchase. “It remains vital for Canadians – particularly homeowners – to be prepared for the inevitable rise in interest rates.”
Those living in Ontario are the most likely (34 per cent) to expect interest rates to stay steady over the next five years, whereas those in the Prairies are the least likely (27 per cent). Twenty-eight per cent of British Columbians expect rates to stay steady.
The report also showed that, while the timing of the rise in rates may be different, Canadians are taking the right steps — 76 per cent plan to “stress-test” their mortgage against a higher interest rate to ensure they can afford their home over the long term. Ontarians are the most likely (80 per cent) to stress-test their mortgage, while Atlantic Canadians are the least likely (62 per cent). British Columbians are also likely to stress-test, at 75 per cent.
“For both first-time and repeat buyers, it’s essential to stress-test their mortgage against a higher interest rate to ensure they can manage a rise in costs as a result of any potential increases in interest rates down the road,” added Ms. Hinojosa. “It’s also wise to choose a mortgage with a shorter amortization, which can help homeowners become mortgage-free sooner.” Other key findings include:
— One-in-three (32 per cent) first-time buyers are unsure how long they will live in their first house
— Two-in-three (68 per cent) consider their first home to be only a “starter home”
— Six-in-ten (63 per cent) have made cutbacks to their lifestyle to save for their first home
— One-in-four (27 per cent) expect their parents or other family members to help them pay for their first home
Ms. Hinojosa added that those who are ready to enter the marketplace can get a head start on planning by getting pre-approved for a mortgage before setting out to lock down the perfect home.
For those looking to buy a home, try BMO’s Mortgage Calculator to complete an affordability assessment and determine how much you can realistically afford: http://www.bmo.com/calculators/hmcia/index.jsp?lang=en.
The BMO First-Time Home Buyers Report was conducted by Pollara. Survey results cited in this report are from online interviews with a random sample of 2,000 Canadians 18 years of age and over, conducted between February 25 and March 5, 2013. As a guideline, a probability sample of this size would yield results accurate to +/- 2.2 per cent, 19 times out of 20. Data has been weighted by region, gender, and age, based on the most recent Census figures, so that it is representative of all adult Canadians.