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BMO: Time for Homeowners/Prospective Buyers to Stress Test their Budget

TORONTO, December 22, 2009 – The housing market in Canada has seen existing Canadian home sales surge 76 per cent from their January lows. Not only that, in November, existing home prices spiked 19 per cent above year-ago levels, the second fastest clip in two decades. With record low interest rates, more people than ever are looking to purchase a home. However, BMO experts are predicting that interest rates will rise in 2010.

“We expect the Bank of Canada's overnight rate target to climb from 0.25 per cent beginning in July 2010, to 4.25 per cent in mid-2012. In turn, consumers can also expect mortgage rates to increase,” said Sal Guatieri, Senior Economist, BMO Capital Markets. “While today's ultra-low borrowing costs represent a unique opportunity to purchase a property, home buyers need to proceed with caution and keep in mind that renewal rates will likely be substantially higher in coming years.”

“Stretching the limits of your budget by choosing the maximum amortization period and a minimum downpayment leaves you little wiggle room to deal with an unexpected financial challenge,” said Jane Yuen, Senior Manager, Mortgages, BMO Bank of Montreal. “A meaningful downpayment and shortening your amortization by making extra payments on your mortgage will save you tens of thousands of dollars in interest costs.”

Top Tips to Consider:

Consider a shorter amortization:

The shorter the life of the mortgage, the less you pay in interest.

Make a larger downpayment:

If you can provide a bigger downpayment, it's a significant way of helping you pay less interest over the life of your mortgage.

Make sure you can afford what you signed up for:

Stress test your financial budget using a mortgage payment based on a higher interest rate: customers looking to renew a $250,000 mortgage currently priced at 2.25 per cent would see their monthly mortgage payment increase by $260/month if rates were to increase by 2 percentage points.
Total housing costs (mortgage payments, property taxes, heating costs, etc.) should not consume more than one-third of household income.

Make pre-payments when you can:

Pay weekly or bi-weekly instead of monthly.
Take advantage of 20 20 prepayment privileges:
• Increase your mortgage payment (principal and interest) by up to 20 per cent over the current payment. This option can be exercised once each calendar year, at any time, without charge.
• Prepay up to 20 per cent of the original mortgage principal each calendar year. This option can be exercised in minimum amounts of $100 without charge, some conditions apply.

Always make sure you save for a rainy day:

If you are up to your maximum in debt, you may not be well prepared for the leaky roof along the way.

Think carefully about fixed vs. variable:

While variable rates mortgages have been a winning strategy over the long term, fixed rate mortgages (currently at historic lows) come with the peace of mind of being insulated against rate increases and knowing how much of your mortgage you will have paid down at the end of your term.

In today's heated market, do not get locked into a bidding war that pushes your mortgage payments outside your comfort zone.

Get pre-approved for a mortgage so you know your budget.

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