"But Interest Rates Are So Low" - Why Affordability Is Still An Issue For Home-Buyer Hopefuls

To start, let's look at the trends in down payments over the past 15 years (the link below will open a new tab). Depending on the location, home type and income measurements you select, you can see how down payment requirements have changed from 2005 - 2020. The dollar amount is shown on the y-axis and the x-axis expresses the down payment amount in terms of number of years of income. Click here to view these down payment trends.


In just fifteen years, the upfront cash needed to buy a home has increased dramatically in many cities. Even in circumstances where an individual is able to save up for a 5% or 10% down payment, their income levels limit the selection of homes they qualify for, forcing them to continue saving more and hoping that future home price increases don't outpace their savings.


Given how challenging home ownership will be for many younger Canadians, it is crucial that you start planning early if you hope to become a homeowner in the coming years. Our tool can help you set your expectations and understand how different variables (income, rent, investing, etc.) will impact your ability to achieve your goal: Down payment planner


Another point that some people make is that lower interest rates will help you qualify for higher priced homes, since the monthly mortgage payments are lower. This is not true because when you apply for a mortgage, you will be subjected to a stress-test. The stress-test is so banks are comfortable that you could continue making mortgage payments if interest rates increase in the future. In Canada, mortgage rates are typically renewed every three or five years, and cannot be locked in for the entirety of the mortgage term. Even if your actual mortgage rate is lower, your maximum allowable home price will be calculated using the Bank of Canada qualifying rate of 4.79%.


The decline in interest rates has been one of many reasons why home prices have increased in many cities in recent years. The table below shows the monthly mortgage payment for the benchmark two storey home price. The calculations use a discounted 5-year mortgage rate of 3.19% for December 2018, 2.49% for December 2019, and 1.39% for December 2020 (per Ratehub.ca).

For 24 out of 25 regions, home prices increased from 2019 - 2020, resulting in a higher down payment requirement. For 14 out of 25 regions, the 2020 benchmark mortgage payment was higher than 2019. Within one year, home prices in most cities increased enough to offset the favourable impact that lower rates have on mortgage payments.


Even if a household is able to save the cash and purchase a home - they face the risk of higher mortgage payments when the mortgage is up for renewal in 3 - 5 years. For example, the initial mortgage on the Vancouver home priced at $1,735,400 would have been $1,388,320 assuming a 20% down payment, and after five years, the loan principal would be paid down to $1,147,831. If mortgage rates increased back to the December 2018 level of 3.19%, this would cause mortgage payments to increase from $5,481 to $6,476 upon renewal. This is the danger of buying a home which has seen prices inflate due to lowered interest rates.


So who benefits from the lower interest rates? Those who are already homeowners and are either up for renewal or in a position to refinance their mortgage could see significant decreases to their monthly mortgage payments. These households would see the opposite effect of the Vancouver example in the previous paragraph. In fact, in the early 1990's mortgage rates were in the low double-digits, and with mortgage rates consistently declining since then - those who bought during this period have benefited greatly.


In summary, low interest rates have mainly benefited existing homeowners. Being a part of the reason why home prices have been consistently growing, it has really done more harm than good to anyone that has not entered the housing market. Down payment requirements continue to be an increasingly difficult barrier to entry, which means that any hopeful homeowners need to plan early and plan smart.


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