April 6, 2018

Mortgage Matters: Rates going up? Don’t be down

How to protect your purchasing power in an era of rising interest rates

By Kevin Lutz

The majority of economists expect that the Bank of Canada will continue to increase interest rates in 2018. So what can you do to protect your home purchasing power in the face of increasing rates? Get pre-approved!
This process provides you with an all-important interest-rate guarantee should rates increase while you are shopping for a home. I suggest this even if you are just thinking about the idea of buying a new home now, since a mortgage pre-approval is absolutely free and carries no obligation to purchase. With the housing market being this active, it is most important to be prepared when making a home purchase. If your mortgage is pre-approved with your rate locked in, you will know what you can realistically afford to pay for a home and, based on your current financial situation, you will know exactly how much you can borrow.
Let’s assume that you firmly intend to buy a house and you now need a mortgage. If you did not get pre-approved, and rates increased, you would qualify for a lower mortgage. Simply put, when interest rates increase, your purchasing power decreases.
Most financial institutions offer 120-day mortgage rate guarantees with the pre-approval. How does this work? Basically, today’s interest rate, including any discount you receive, is guaranteed for 120 days while you shop for a home. If interest rates go up during that time, you automatically receive the guaranteed rate you have locked in. If you are lucky enough that rates go down before you complete your purchase, you get the lower rate. It is a win-win situation for you, courtesy of your financial institution.
Some financial institutions, including RBC, offer mortgage rate holds for much longer periods of time if needed. This is the case if you have purchased a pre-sale, where the closing date of your purchase can be years away. Much can happen when waiting, say, 24 months for your home purchase to complete, so it is very wise to obtain a firm approval and rate hold now.
For people who have been timing their entry into the housing market or for those looking to upgrade their homes, the looming reversal in affordability trending may be a sign to act. With interest rates still near record lows, now more than ever, prospective homebuyers should speak to a mortgage specialist so they can feel confident about buying a home before rates increase.
Next step: Get solidly pre-approved and lock in today’s rates. You will need to confirm your income, down-payment amount and overall credit worthiness. Then you can shop with confidence when looking at homes that are within your budget, and act quickly and confidently when you find the right home.

Kevin Lutz is RBC Regional Sales Manager,
Residential Mortgages

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