Is it the right time to buy?

Many of our clients ask us if it is better to wait for prices to drop before buying.

Unfortunately, we cannot predict whether prices will drop or remain stable in Montreal and its surroundings.

However, if interest rates continue to rise, we assume less and less buyers will be able to afford the purchase of a property. The market would therefore become a “buyers’ market” ; less competitive, driving prices down.

Michel Bédard, mortgage broker, answered some of your questions

Michel Bédard shared with us his predictions regarding the fluctuation of interest rates in the coming months, as well as the pros and cons of each type of rates :

Two questions arise…

”For the past few months, mortgage rates have been rising sharply at both the fixed rate and the variable rate. The two questions I get most often are:

· Will interest rates continue to rise?
· Should I choose a fixed rate or a variable rate?

Two very simple questions, but with answers that can start many debates.”

Will the rates stop increasing?

“To answer the first question, we have to look at the reason for the sharp increase in rates and, based on this aspect, judge whether, in our opinion, this trend will continue. The monetary authorities have indicated that due to the outlook for inflation, the policy interest rate will have to increase further. This rate is the cost that financial institutions will pay when they borrow money from the central bank of Canada. The inflation rate, which is the percentage increase/decrease in the prices of goods and services over a given period, decreased from 8.1% in June to 7.6% in July, while the Bank of Canada wants to bring the inflation rate back to its target of 2%. What we notice is that despite the rise in rates, the correction of inflation does not seem to be carried out in a proportional way. So it seems inevitable that further increases will occur in the coming months.

When inflation approaches its target, will the Bank of Canada lower its policy interest rate with the risk of rising inflation, or will it maintain its policy interest rate as is? Unfortunately, too many factors must be taken into consideration to predict what will happen. So, it is difficult to answer, but in my opinion, a trend reversal should not be taken for granted when choosing between a fixed rate or a variable rate. However, should we turn our backs to the variable rate? Absolutely not.”

Fixed rate or variable rate?

“Why do we always have to consider the variable rate even if the trend is increasing? The variable rate offers greater flexibility, the penalty for breaking the mortgage before the end of the term is generally lower because it does not take into account the calculation of the rate differential and corresponds rather to 3 months of interest only. This flexibility is interesting for those who want to invest in rental property or who are thinking of changing residence before the end of the term. Also, keep in mind that if we take a 5-year fixed rate, we will not take advantage of any possible declines that could occur within the term. This situation could cause a lot of frustration in the future if the rates go down.

With my clients, when we come to the famous point “should I take a fixed rate or a variable rate?”, a great discussion begins. I’m not very keen on just looking at the history of rate fluctuation and giving the argument that the variable rate historically is lower than the fixed rate. In my opinion, this is a simplistic approach. When I discuss with my clients in order to define the best product for them, several questions must be asked in order to fully understand their situation:

• Is this their first home?
• How stable and secure is their current job?
• What is their debt level?
• Do they have the capacity to absorb an increase in the payment or an increase in the amortization of their mortgage?
• What is their ability to handle the stress of rate increases? We will surely experience more increases, are they ready to live with it?

Depending on the analysis of the client’s needs, one can look at the products offered by the different banks and make an informed choice. Several options are possible, you just have to be able to know them and understand them well. An informed choice brings peace of mind to clients because they better understand the reason for their choice.

If you would like to discuss it, do not hesitate to contact me.

Michel Bédard
Mortgage broker, PlaniPrêt
514-569-6511 »

So… Should you wait before buying?

In our opinion, always waiting for “the right moment” to buy is not the best strategy. Here’s why :

• It is difficult to predict market fluctuations in advance, as they are influenced by multiple factors.
• The buyer who is currently a tenant continues to pay their rent (an amount of money not invested), and does not enjoy the joys of living in their future property which they will own.
• The buyer is constantly questioning themself, and even when a good moment presents itself, they always imagine a better moment could present itself in the next few weeks or months.
• Very often, when property prices drop significantly, it is also because interest rates* are much higher. And when interest rates go down, the prices of properties increase… there is always a balance that is created and the buyer can rarely be winning on every aspect.

In conclusion, there is never a “best” time to buy! If you are financially stable, tired of paying off your landlord’s mortgage or living with your parents, and fall in love with a property…this is your perfect moment!

* For an investor, the impact of rising interest rates is less because mortgage interest is considered an operating expense. In fact, when a property is rented, the tax-deductible mortgage interest is proportional to the portion of the area rented and the duration of the rental. For example, in the case of a property 100% intended for rental all year round, all interest expenses will be tax deductible.