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Cheap money and an era of near-record low interest rates could soon be coming to an end. For first-time home buyers, this means the window of opportunity for locking in a mortgage at reasonable rates is beginning to close.

And it’s been a long time coming. Government interest rates in Canada and the United States have been exceedingly low since the worst of the financial crisis. In fact, over the last three years, government bond yields have been in a free fall. In May, the five-year Government of Canada bond yield dropped below 1.2%.

A lot has changed in the last few months.

While bond yields were expected to climb, their rapid rise has been a lot quicker than anyone had anticipated. Since the beginning of May, the five-year government bond yield has climbed from 1.15% to 1.76%. Over the same period of time, the 10-year Government of Canada bond yield has climbed from 1.68% to 2.48%. Yields on the 30-year bond crossed the 3.5% mark, the highest level since October 2011.

It’s important to be aware of bond yields, because they have a direct impact on virtually every corner of the economy, from residential mortgage rates to pensions. The sudden increase in bond yields—the return you get on a bond—has caught many Canadians off guard; in the past month alone, the Royal Bank of Canada has raised mortgage rates twice.

Because the Canadian economy is inexorably linked to the U.S. economy, it’s essential that first-time home buyers also be aware of U.S. bond prices. Since the beginning of May, the yield on 10-year U.S. Treasuries has jumped from about 1.9% to 2.5%, their highest rate since August 2011.

Longer-term bond yields have been on the rise over the last few months, on the heels of encouraging economic conditions in the U.S. Recent data shows that second-quarter U.S. gross domestic product came in at a robust 1.7%, beating projections of 1.1%.

The stronger results means the U.S. Federal Reserve could start to wind down its $85.0-billion-per-month bond-buying program this fall. The Federal Reserve initiated its bond-buying program back in 2008, in an effort to kick-start the American economy out of the Great Recession. The Bank of Canada is expected to raise interest rates in 2014.

After hovering near record lows for years, how high are bond yields and mortgage rates expected to go? Some economists expect to see the U.S. 10-year Treasury yield hitting between five and six percent within the next two years.

At Canadalend.com, it’s our opinion that, on the backs of an improving North American economy, interest rates in Canada and the United States have begun their ascent. And, with many economists expecting the second half of the year to be even stronger, interest rates could surprise many by moving significantly higher.

While the Bank of Canada has said it doesn’t expect to raise its lending rates until 2014, this doesn’t mean Canadian banks won’t raise their long-term mortgage rates beforehand. In fact, it appears they have already begun to do so.

With bond yields and mortgage rates on the rise, now is the perfect time for first-time home buyers or those looking to refinance to contact their local Canadalend.com agent and get their long-term mortgage pre-approved.

Source:
Shmuel, J., “It’s a bear market for bonds ahead: CIBC,” National Post July 30, 2013; http://business.financialpost.com/2013/07/30/its-a-bear-market-for-bonds-ahead-cibc/.

It looks like after years of near-record-low interest rates, Canadians are getting a little too used to easy money. And that could spell “financial headache” for those homeowners unprepared for the coming spike in interest rates.

That interest rate shock may come sooner than most Canadians think. According to a recent report, 31% of Canadians expect interest rates to stay the same over the next five years.1

The Organisation for Economic Co-operation and Development, on the other hand, says the Bank of Canada will probably begin raising the overnight lending rate—which tracks and impacts variable mortgage rates—in the second half of 2014.2

While that timeline might seem like it’s on the distant horizon, it’s important for homeowners to be prepared for the eventual rise in interest rates. While the Bank of Canada has not yet raised the overnight lending rate, it did say the long-term goal is still a “gradual normalization.”

What this means to first-time home buyers or those with mortgages coming up for renewal is that the cost of borrowing is going to gradually increase. Don’t let the word “gradually” fool you; it can add up, and fast!

As a result, buyers should factor this increase into the equation when planning their purchase. In May 2013, Canada’s five big banks were selling five-year closed mortgages near 2.99%; today, its 3.59%. Those 60 basis points translate into higher monthly payments and interest.

For example, back in May 2013, a $500,000 mortgage with a maximum 25-year amortization period at three percent would translate into a monthly payment of $2,366.23. Over five years, $69,346.66 would be paid out in interest.

At 3.59%, that same mortgage now means home buyers are paying out $2,520.16 per month, and over five years, $83,311.64 is paid out in interest. What happens if interest rates rise to five percent? That $500,000 mortgage now costs $2,908.02 per month, with $117,008.94 paid out in interest.

It’s inevitable that interest rates will rise; the big question is, will Canadians be able to handle the higher interest rates? With the awaited rise in interest rates not expected to occur until late 2014, now is the perfect time for first-time home buyers and those up for renewal to “stress test” their mortgage against a higher interest rate and see if they can afford it over the long term.

The experts at Canadalend.com also think it’s a good idea to consider a mortgage with a shorter amortization period. While the monthly payments are higher, the homeowner is mortgage-free sooner and pays out less in interest. A $500,000 mortgage with a five percent interest rate amortized over 20 years means paying $3,258.63 per month, with $114,018.00 going to interest.

First-time home buyers ready to take the first step on the property ladder can get a head start by getting pre-approved for a mortgage. Pre-approval lasts for 120 days and is locked in from the day you start the process. With interest rates rising, Canadalend.com warns that getting pre-approved now could save home buyers thousands of dollars in interest charges.

Whether you’re a home buyer or looking to refinance, a licensed Canadalend.com agent will research all of the major banks and lending institutions to ensure you get the mortgage best suited to meet your financial goals.

Sources:

1. “First-Time Home Buyer’s Report: One-Third Expect Interest Rates to Remain the Same Over the Next Five Years,” Bank of Montreal web site, July 4, 2013; http://newsroom.bmo.com/press-releases/bmo-first-time-home-buyer-s-report-one-third-expe-tsx-bmo-201307040884671001 .

2. Mayeda, A., “Look for rate hikes in late 2014, OECD tells Canada,” Financial Post May 31, 2013; http://business.financialpost.com/2013/05/29/oecd-canada-outlook/.

Your home is probably the single most valuable item you will ever purchase. Not only will it be the most expensive item you will probably ever buy, but you will also need to spend a lot of additional money on upkeep, renovations, etc. On top of that, it’s quite possible you’ll live in it for five, 10, 20, or even 30+ years.

With so much at stake, it’s important to be as well-informed as possible before you sign the dotted line and lay out the welcome mat. That includes finding out what kind of mortgage you want to consider (fixed or variable) and how much you qualify for. It also means considering current interest rates.

In early 2013, Canada’s big banks were offering five-year fixed mortgages with interest rates of 2.99%; by Labour Day, they were near 3.89%. With mortgage rates on the rise, many first-time home buyers fear that affordability will be out of reach.

That doesn’t mean you should jump into the markets and buy a home just because interest rates are on the rise. But that’s exactly what many Canadians are doing! Fearing the end of low mortgage rates has sent Canadian home shoppers into a buying frenzy.

Using their near-record low pre-approved mortgage rates, home buyers sent Canadian August sales up 50% in some regions. The Toronto area experienced a 21% year-over-year sales jump in existing home sales; Vancouver was up 52.5%; Calgary, 27.5%; Victoria, 20.7%; and Edmonton, 9.9%.

Despite the recent rise in interest rates, it’s important to remember that five-year mortgage rates are still well below their historic average. Because the Canadian and U.S. economies and monetary policies are closely linked, it’s also good to remember that Canada’s mortgage rates run closely with the U.S. housing market. In January 2008, before the U.S. housing market crashed, the interest rate on a Canadian five-year fixed mortgage was 5.89%.

It might be tempting to jump onto the property ladder to take advantage of near-record low interest rates, but in an excited market, there is also the temptation to overpay for a house just to lock in at a low rate.

There’s more to consider when it comes to buying the home of your dreams than just interest rates. While it’s a major issue, it shouldn’t be the only thing you factor into the equation.

That’s why it’s important for first-time home buyers to work with a respected lender that has their best interest at heart—one that has a proven track record of helping clients successfully navigate the world of home financing.

Whereas banks and other lender institutions will only recommend their own financial products, the independent agents at Canadalend.com will search all of Canada’s banks and lenders, looking for the mortgage best suited to your budgetary and lifestyle needs.

We want you to achieve both your short- and long-term financial goals! At Canadalend.com, we’ll do everything we can to ensure you make the most informed decision possible—one that puts you on a stronger financial footing.

There are a lot of different things to consider when it comes to finding your dream home: price range, ranch, bungalow, brick, mid-century modern, the number of bedrooms and bathrooms, whether you want a big backyard…the options are almost endless.

While shopping for a dream home is supposed to be fun, not many people feel the same when it comes to shopping for a mortgage. But since a home is probably the largest single purchase most Canadians will ever make, the experts at Canadalend.com believe it’s important for first-time home buyers to have a solid understanding of what to look for when it comes to finding the best mortgage.

Knowing what to consider can help home buyers better understand their financing options, which in turn will have a direct impact on their overall monthly costs. Knowing your options could also help you save tens of thousands of dollars in interest over the life of the mortgage, ultimately, helping you plan for a better future.

Down Payments – At Canadalend.com, we know that when it comes to the down payment, more is better. To get a conventional mortgage (one that does not exceed 80% of the purchase price), home buyers in Canada need to come up with a 20% down payment.

There are many benefits to having a larger down payment. Most significantly, it reduces the amount of your monthly principal and interest payment. It also decreases the amount of interest you pay over the life of your mortgage.

That said, life can be full of challenges, making it difficult to save up the full 20%. That said, you can still purchase a home in Canada with as little as a five percent down payment. Doing so, however, means getting a high-ratio mortgage, which entails purchasing default insurance, the cost of which is charged to the buyer as a closing cost or financed through the mortgage.

Mortgage Options – Interest rates are only one consideration when it comes to getting a mortgage. The independent licensed agents at Canadalend.com can show you a wide range of mortgage options and help you select one that best suits your lifestyle needs.

Fixed versus variable interest rate – With a fixed interest rate mortgage, homeowners get stability, as the interest rate and monthly payments stay the same throughout the term of the mortgage. With a variable interest rate mortgage, homeowners are susceptible to changing interest rates; if it goes down, you pay more on the principle, and if it goes up, more goes to interest. A variable interest rate mortgage opens the window to potential savings if interest rates go down.

Open versus closed mortgage – A closed mortgage has a specific term—anywhere from six months to 10 years. Closed mortgages also have limits on when they can be refinanced or renegotiated, and there may be charges if you do either one earlier than expected. An open mortgage is often negotiated for a shorter period and can be paid off at any time; this flexibility usually comes with higher interest rates.

Accelerated Payment Option – The faster you pay off your mortgage, the less you pay in interest. Homeowners can save money by choosing an accelerated payment plan (weekly, bi-weekly) or a shorter amortization period. It all comes down to lifestyle.

A shorter amortization period will mean higher monthly payments; the quicker you pay off your mortgage, the less you pay in interest. A longer amortization period, on the other hand, means paying less each month, freeing up much-needed cash.

While it’s important to get the lowest interest rate possible, there’s a lot more to consider when it comes to selecting a mortgage.

As the country’s leading low-cost private mortgage solution provider , Canadalend.com agents draw from hundreds of banks and lenders to help you secure the financial products best suited to your financial needs. If you are interested in obtaining a home mortgage or even want to know what your options are, visit Canadalend.com or apply online.