Just take a quick look at mortgage calculator for possible rising interest rates and housing market correction. Let’s see if house buyers, lenders, and economy would be benefited from it or not as many people said out there.
Mortgage calculator: https://tools.td.com/mortgage-payment-calculator/
·
The current variable rate is 1.55% for 5 years. Assuming
house price is $1,000,000.
· Assuming the interest rate goes up to make mortgage rate to 5%, which caused housing prices corrected down -25%. Assuming house price drops to $750,000.
Using mortgage calculator, we got the following data:
1. Mortgage
$1,000,000 and 1.55% 5-year variable rate
* $4,299.55 monthly mortgage payment
Balance after 5 years term
Total
payments over term $241,233.00
- Interest
paid $70,851.01
= Principal paid $170,381.99
Balance at end of term $829,618.01
2. Mortgage
$750,000 and 5% 5-year variable rate
* $4,582.54 monthly mortgage payment
Balance after 5 years term
Total
payments over term $261,722.40
- Interest
paid $175,476.21
= Principal paid $86,246.19
Balance at end of term $663,753.81
3. Saving by home buyers
House buyers pay and extra sum of ($4582.54 – $4299.55) = $282.99/month, i.e. an extra of $282.99 * 12 months * 5 years = $16,979.40.
The different balance at the end of term $829,618.01 - $663,753.81 = $165,864.20.
The home buyers would save $165,864.20 - $16,979.40 = $148,884.80 in their pocket.
Interest rates would go down after 5 years, i.e. less than 5%, based on historical facts and data.
4. Benefits to lenders
The mortgage lenders only need to lend $750,000 instead of $1,000,000 to home buyers but collect higher interest payment. It considers less risky to lenders.
Extra interest earned by lenders: $175,476.21 - $70,851.01 = $104,625.20
Lenders could use extra $250,000 saving from mortgage lending to invest in other parts of economy.
5. Benefits to economy
Lenders are making more money for its investors and investing in other parts of economy.
New home owners save money in mortgage principal and spend in daily activities to push economy upward. The final mortgage debt reduced significantly.
Existing home owners would sell their house at lower price, but they will have a chance to upgrade to bigger houses at lower prices, i.e. net saving.
Interest rate
and mortgage rate will go up and down again along with economy cycles, i.e.
mortgage rate will go down in the future after its peak.
Notes: It was an example about rising mortgagefont-family: "Cambria","serif";
rate. It doesn't mean that mortgage rate will be at 5% for 5 years. Mortgage
rate may rise higher than 5% and drop lower after a few years.
Just take a quick look at mortgage calculator for possible rising interest rates and housing market correction. Let’s see if house buyers, lenders, and economy would be benefited from it or not as many people said out there.
Mortgage calculator: https://tools.td.com/mortgage-payment-calculator/
·
The current variable rate is 1.55% for 5 years. Assuming
house price is $1,000,000.
· Assuming the interest rate goes up to make mortgage rate to 5%, which caused housing prices corrected down -25%. Assuming house price drops to $750,000.
Using mortgage calculator, we got the following data:
1. Mortgage
$1,000,000 and 1.55% 5-year variable rate
* $4,299.55 monthly mortgage payment
Balance after 5 years term
Total
payments over term $241,233.00
- Interest
paid $70,851.01
= Principal paid $170,381.99
Balance at end of term $829,618.01
2. Mortgage
$750,000 and 5% 5-year variable rate
* $4,582.54 monthly mortgage payment
Balance after 5 years term
Total
payments over term $261,722.40
- Interest
paid $175,476.21
= Principal paid $86,246.19
Balance at end of term $663,753.81
3. Saving by home buyers
House buyers pay and extra sum of ($4582.54 – $4299.55) = $282.99/month, i.e. an extra of $282.99 * 12 months * 5 years = $16,979.40.
The different balance at the end of term $829,618.01 - $663,753.81 = $165,864.20.
The home buyers would save $165,864.20 - $16,979.40 = $148,884.80 in their pocket.
Interest rates would go down after 5 years, i.e. less than 5%, based on historical facts and data.
4. Benefits to lenders
The mortgage lenders only need to lend $750,000 instead of $1,000,000 to home buyers but collect higher interest payment. It considers less risky to lenders.
Extra interest earned by lenders: $175,476.21 - $70,851.01 = $104,625.20
Lenders could use extra $250,000 saving from mortgage lending to invest in other parts of economy.
5. Benefits to economy
Lenders are making more money for its investors and investing in other parts of economy.
New home owners save money in mortgage principal and spend in daily activities to push economy upward. The final mortgage debt reduced significantly.
Existing home owners would sell their house at lower price, but they will have a chance to upgrade to bigger houses at lower prices, i.e. net saving.
Interest rate
and mortgage rate will go up and down again along with economy cycles, i.e.
mortgage rate will go down in the future after its peak.
Notes: It was an example about rising mortgagefont-family: "Cambria","serif";
rate. It doesn't mean that mortgage rate will be at 5% for 5 years. Mortgage
rate may rise higher than 5% and drop lower after a few years.
Both Bank of Canada and US Fed increased rate by +0.25%. Inflation is very high, but they're afraid of the impacts of Russia - Ukraine war.
ReplyDeleteInflation rate will shoot up higher and quicker. This is the dilemma of central banks. Our purchasing power is going down so quick.
Increasing interest rate is the tool of central banks to bring down inflation, but it would also slow down fragile economy. The mortgage rate would go up along with interest rate set by central banks. This higher mortgage rate would trigger correction in residential housing markets.
Let's wait and see how central banks deal with those issues.
By looking at grocery, gasoline, or credit card bills, we could see the impacts on many household budgets.
As of 2022-03-02 with only +0.25% rate increase, crude oil shot up +7.48% to US$111.14/barrel.
By the way, the inflation rate was around +2% in the past and central banks had to increase interest rate to around +3%. This time the inflation rate is higher than 5% (their official report, but it should be higher).
Building new houses require lands and time (longer time to commute and packed highway). New houses would be expensive to new home buyers, if you analyze the current market price, labor costs, and building materials.
ReplyDeleteIf you deflated housing market by raising interest rates and limit foreign buyers/gamblers, there would be millions of houses with reasonable prices on the market within a year. This would be good for home buyers and future economy, too.