rates
LOWER RATES MEAN PAYMENTS ABATE As interest rates change (up or down), there is a general tendency on the part of analysts to focus more on the rate changes themselves and less on what they actually mean for borrowers. So, how is the changing rate landscape impacting the pockets of borrowers? If we assume for a typical mortgager a few standard parameters—a 30% gross-debt- service ratio, a 25-amortization period, and we use CMHC’s 5-year conventional rate (refer to the previous section for details on
this)—we can evaluate in a more meaningful way the benefits of declining rates. More specifically, the monthly cost of borrowing $100K has fallen by $10 fromQ2 to Q3 2019, and by $15 fromQ3 2018. If we consider the impact of this on a household that is purchasing a $882K home (the most recent average resale price for the Lower Mainland) with 20% down, this translates to a monthly savings of $106—meaning there’s some found money to be saved and/or spent elsewhere within the local economy.
THE SHRINKING MONTHLY COST OF BORROWING $100K
$560
$551
$550
$546
$540
$536
-$10
$530
$528
-$15
$520
+$8
$510
Q
Q
Q
Q
ASSUMPTIONS:
YEAR AMORTIZATION CMHC CONVENTIONAL YEAR RATE % GDS
SOURCE: RENNIE CALCULATIONS
DATA: MONTHLY DEBT SERVICE OBLIGATION OF BORROWING $100K
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