“INTEREST RATES!”

Do those two words send a shiver up your spine?

Most people fall into one of two categories: 1) Those that have a mortgage, 2) Those that don’t….yet.

After yesterday’s modest 260-point decline in the S&P/TSX Composite Index (that’s pennies compared to Tuesday’s 400-point decline!), it gets people thinking about the economy, the Canadian Dollar, and of course, Interest Rates…

When I purchased my condo earlier this year, I locked in to a 5-year, fixed-rate of 4.99%, as did my brother and his fiancee who also bought a condominium shortly thereafter.

At the same time, my mortage broker, Joe, told me the story of a young couple he represented, who absolutely insisted upon taking a variable rate mortgage.  Their rationale: “We want to reap the rewards if rates go down.”

I wonder how they felt when rates went up 3/4 of a percent over the next couple of months.

It’s a risk-reward proposition; on the upside, that young, naive, couple could have saved ten or twenty basis points if rates dipped a little bit, but the downside is virutally endless!  Rates could go up to 5.25%, or 5.5%.  What about 5.75% or 6.00?  How about 7.00% or 9.00%?

Get the point?

Joe shook his head so hard at this couple that he had a headache for days.  In the end, Joe feels it’s no longer a decision whether to lock in to a fixed rate, but when.

My friend Pete just bought a condo and received the best rate possible at the moment: 5.79%.

How much of a difference does this make?  Let’s work through an example.

Let’s assume that you purchase a condo and take a $250,000 mortgage.

• At the 4.99% rate that I received back in April, monthly payments on this $250,000 mortgage would be approximately $1,162.07.
• At the current 5.79% rate, mortgage payments would be $1254.75.
• When rates go up in September (more on this in a moment), assuming a quarter point increase to 6.04%, the $250,000 mortgage would cost $1284.37 per month.
• 7.0% interest rate: $1400.83
• 8.0% interest rate: $1526.43
• It pains me to continue this exercise…

The truth of the matter is, we are not that far away from an 8.0% interest rate.  This could easily happen in the next five years, and the affordability of owning a property will be significantly diminished.

At the moment, the difference between a 4.99% rate and a 5.79% rate in the $250,000 mortgage example is only $92.68 per month.  Is that so bad?  Well, add in your monthly condo maintenance fees or the utilities on your house, property taxes, your monthly car lease payments and insurance, gym membership, cell phone bill, etc., all of a sudden that $92.68/month is starting to look pretty significant!

And this example is “only” for a $250,000 mortgage, and “only” for a mere 3/4 interest rate increase.

What about a $700,000 mortgage on a larger home?  Or if rates increased to 6.75% by the end of 2008?

Rates ARE going up.  Count on it.  I expect rates to go up over 6.00% this coming September simply because my mortgage broker, and many others in his industry believe so.

But it’s not too late, you haven’t missed the boat completely!

I have clients tell me “I’m a fool for not buying a house this time last year and getting a sub-5% rate.”  Well, what’s that old saying: “Fool me once, shame on you, fool me twice, shame on me”?

Waiting longer to purchase a property will only result in higher rates, higher monthly mortgage payments, and ironically, higher prices for real estate!  Let’s not forget that the price of real estate continues to rise as well.

A mortgage is an technically a liability, but I like to think of it as an asset, that is to say, that my 4.99% rate is an asset and a selling feature if I were to list my condo for sale today.  The interest rate you receieve with your mortgage is an investment, and could rise or fall in value just like a stock or a bond.  With rates at 5.79% today, and with my mortgage at a 4.99% interest rate, it’s safe to say my investment has gone up in value.

Just because your aunt got a rate of 4.29% when she bought her house, your friend got a rate of 4.99% when he bought his condo, and your co-worker just got a rate of 5.55% last month, doesn’t mean you shouldn’t be thrilled to get today’s rate of 5.79%, or even a 6.04% rate in September.

No matter what investment you make, there is always going to be somebody who did it better, so get used to it.

Be smart, get a fixed rate, and do it soon!