What if interest rates go up?

15 Replies

I'm sure we all know central bank rates are quite low in Canada and the US, and I don't want to get burned if they go up in real terms at some point. When considering buying a property, do you make any allowance for interest rates to go up?

I'm house hacking now and considering spending around $20,000 to finish my basement and add a bedroom down there. So in my situation if my mortgage payment goes from $1,000 to $1,800 that would more than wipe out my cash flow.

Also, does it typically matter to tenants how old houses are when determining how much to charge for rent? My house is 57 years old and I don't think it would be worth it to gut it and rebuild from the studs.

@Travis Lucy I think about interest rates going up, but it is only 1 factor to consider. Personally, I don’t get overwhelmed by thinking about that. What numbers are you using that show your payment going from $1,000 to $1,800? That’s seems like way too high of a jump to only be caused by interest.

@Travis Lucy

Well, if you’re worried about interest rates going up in the future, wouldn’t it make sense to get the loan and do the work now, rather than later.

And like somebody else said, how is your mortgage going up $800? If you’re wondering if you should make a real world decision, post your exact numbers and dilemma and let the boards give some thoughts and ideas.

Type "mortgage calculator" into Google.  Calculate the actually increase.  On a $200,000 mortgage a 1 percent increase will increase about $115 from today's rates. 

Rates have been below 5 percent for a long time and it's unlikely they're going above that anytime soon.

Most renters don't care about the age of the property. They care about what they can see. 

@Travis Lucy Apart from what’s been said above, if you’re really worried about interest rate going up, then you should try to lock in fixed rate mortgages.

@Travis Lucy    If you are in Canada and have a fixed rate mortgage, every 1, 3 or 5 years (whatever the term is for your mortgage) your interest rates will change over the lifetime of your mortgage (15, 20, 25 years).  While you can't predict what will happen to the rates, you need to factor in rate increases.  When your mortgage is coming up for renewal and you think rates will go up, you can actually renew your mortgage several months early with no penalty to lock in at the lower rate.  Rates are historically low, so chances are they will go up.

In addition to what was said above, keep in mind rates usually go up by 0.25%-1.0% at a time and at specific times will the Bank of Canada consider increasing it, so it will take several increases for you to see the $800/m increase you are fearing. If you have the $20K now to do the reno, and can recoup that back in 3-6 months (either through rent income and equity pullout), then it makes sense to do the reno now. Regardless if you are in a variable or fixed mortgage now, considering doubling up on your payments if you have cash so you can decrease the overall interest you are paying and when you refi, you should be able to access more equity via a HELOC.

Originally posted by @Daniel Hennek :

Type "mortgage calculator" into Google.  Calculate the actually increase.  On a $200,000 mortgage a 1 percent increase will increase about $115 from today's rates. 

You make a good point. Part of my nature is that I'm conservative-aggressive. I was wondering about this because of the sky high interest rates 40 years ago. As some of us may know, the economy in Canada and the US is not nearly as fundamentally strong as it was in the lead-up to the 1970s, so this would mean there's really no chance of returning to 20% interest rates by our respective central banks. There's also the fact that unions have much less bargaining power today than they did in the seventies, so that greatly decreases the risk that price inflation would keep up with monetary inflation. And without that price inflation (read "inflation" for most people) there is again much less need for very high interest rates.

Travis.  It would be great to lock it in if you could.  But the long-term forecast on interest rates is encouraging. I read that the 10-year forecast is for little to no increase in rates. Here is a forecast for the next few years: https://longforecast.com/libor-forecast-2017-2018-2019

I'm probably in a pretty unusual position. My mom inherited this house when my grandma died a couple years ago. I'm house hacking it - along with not paying my mom rent - and I'm effectively homeowner but I don't have my name on the title deed. The plan is that I'll buy this house for $300000 when I can make a 5% down payment (the minimum in Canada).

Now - I think finishing my basement would jack up the house price, so I don't want to do the renovations until I've already bought the house.

I have a pretty small income, about $37000 including rent from my tenant, but I'm able to save about $8000 per year. With my income I'd qualify for about $200000 of mortgage right now. If we account for the $180 monthly extra cash flow after I build this bedroom and put a good tenant in it, my income would go up to $39000 annually.

I usually pay up for “interest rate insurance” (10 year fixed financing).  You shouldn’t buy a car from the only dealership you stop at and it helps to shop at least 3 lenders, and that’s 3 lenders that actually want your business.  One thing I wish I would have done earlier in my career is look over the actual loans docs closer.  What is your personal guarantee?  What if any properties are cross collateralized in the loan?  What is the prepayment penalty if you sell or find a better loan?  Finding long term financing and negotiation the above all give you flexibility which is nice if things get tight.  

I don’t mind putting money into older properties.  If you keep them up and do the maintenance they will appreciate in value if the location is solid.  The tenants who call us ask how many bedrooms or square feet, never had someone ask me the age of the unit. Best of luck to you!  

Everyone here has had excellent advice.  I have a few questions though.  If your current salary qualifies you for $200k mortgage, how are you going to qualify for $285,000 when you get your 5% down?

Also, are rooms really only renting for $180/mo?  Maybe do a little research and see if that makes sense.  Perhaps you are short changing yourself on your house hack.

You stated you wanted to wait until after you bought the property to do the basement repairs because it would increase the value of the house. Did you agree to a set price with your mom on the house, or did you agree to market price? In the states, the better your LTV the better off you are for you loan. Canada may be a bit different.

@Travis Lucy   If it is a full basement that you could rent it as a basement suite or extra rooms, you'd get you money back from that in a few years.  Write up a contract with your mom agreeing on the sales price of the home and that you can finish the basement now.  Not sure what state the basement is in. If you just put in bedrooms to rent, leave some space for a separate living area (and bathroom) plus a kitchen that could be added later.  then when you have more money saved up, add a second kitchen and close off the basement as a separate unit.

The situation you are in is ideal as you have a lot of options with this house.

If you are buying the home as a rental, the bank doesn't care as much about your income as long as the rental will generate sufficient income.

You could check with an appraiser to see if it makes sense to renovate the basement as sometimes the renovations may not bump up the value of the home as you might expect. If its your family home there is a really good chance you could purchase it below the fair market value with the amount of money you have right now. 

Feel free to message me if you want some advice on what to do with the home.



Originally posted by @Travis Lucy :

I'm probably in a pretty unusual position. My mom inherited this house when my grandma died a couple years ago. I'm house hacking it - along with not paying my mom rent - and I'm effectively homeowner but I don't have my name on the title deed. The plan is that I'll buy this house for $300000 when I can make a 5% down payment (the minimum in Canada).

Now - I think finishing my basement would jack up the house price, so I don't want to do the renovations until I've already bought the house.

I have a pretty small income, about $37000 including rent from my tenant, but I'm able to save about $8000 per year. With my income I'd qualify for about $200000 of mortgage right now. If we account for the $180 monthly extra cash flow after I build this bedroom and put a good tenant in it, my income would go up to $39000 annually.

@Travis Lucy

You could arrange the purchase from your mother now - at present fair-market value - without having to pull a conventional mortgage {at least right away}.   You could provide a downpayment and either structure it with your mother as the lender {your would make mortgage payments to her} or structure it as an instalment sale (you still make payments to your mother,  but the property would remain in her name until you finish ... or re-finance with a conventional mortgage).   The two are treated differently by CRA ... so you and your mother would want to consult with an accountant to decide which approach works best for each of you (mostly for Mom) and then with an attorney to draw-up the mortgage agreement.

In the first instance (mom the lender), the house would be in your name and you would be able to make any modifications (finish the basement) without it impacting your acquisition price.   In the latter case (instalment sale), you would write in the sales agreement that you will be assuming all maintenance and care for the house - and that you have the right to modify or improve it, which would allow you to finish the basement without impacting your purchase price.