Is it a good idea to "Marry the House, Date the Rate"?
Interested in buying a home soon? Given the recent news that the Bank of Canada is holding rates steady for the time being, some potential homeowners are likely assessing the housing environment. What does the future hold? Will there be a rate drop on the horizon, or will this plateau continue?
While interest rates are certainly important and impact your overall borrowing costs, there’s a home buying strategy you may have come across that offers a new approach: “Marry the house, date the rate.” What exactly is this all about? Let’s take a look.
What does it mean to “Marry The House, Date The Rate”?
“Marry the house, and date the rate” encourages home buyers to focus on finding their dream home for the long term rather than fixate on attaining the lowest interest rate possible. Why? Because in a high interest rate environment, homes tend to drop in price, so while rates are higher, overall cost of ownership is lower. Further, many Canadians tend to choose shorter fixed-rate terms in this environment, such as 2 or 3 years. So you can always renew or refinance in the future and change to a more favourable rate that can save you money over time. Popular during periods of high interest rates, this strategy advises home buyers to not delay their purchase and instead, commit to the perfect property rather than the rate.
While this may sound appealing, it's important to take a cautious approach as there are several factors that can influence how successful this strategy can be. These include rate decisions by the Bank of Canada, the future value of your property, duration of ownership, and/or your personal circumstances. Understanding the impact of these factors and the potential risks will help you determine if this strategy is right for you.
A quick high-level calculation
If a home is priced at $900,000, with a mortgage of $720,000 (20% down payment) when interest rates were low at 2.5%, monthly mortgage payments would be roughly $3,250. After a five-year mortgage term, the remaining mortgage would be roughly $610,000.
As interest rates increase, home prices have been dropping 10% to 20%. If we take 15% off the price above, it will be $765,000. With a 20% down payment, this nets to a $612,000 mortgage. With an interest rate of 5.6%, monthly payments will be $3,795. The remaining principal after five years is roughly $547,165.
Difference in monthly payments = $545
After 5 years, additional monthly payments = $32,700
After 5 years, difference in remaining principal = $62,885
Total 5 year savings buying at a higher rate, but lower price = $30,135
All paired with a much lower down payment.
What are the potential risks?
Rates may continue to climb
There’s no guarantee that the interest rates will drop so if you’re finding yourself stretched with your current mortgage payments, this may not be the most sensible option for you.
Refinancing may incur additional costs
You’ll have to qualify for refinancing again and meet loan requirements, and there will most likely be prepayment penalties. You’ll have to understand all the costs involved and determine whether the savings from a lower rate will be greater than the refinancing fees.
Rule of thumb: When is it a good idea to "marry the house, date the rate"?
Found your dream home at a good price? If you can comfortably afford the mortgage payments over the long term despite the high interest rates, then it could be a feasible option for you to marry the house and date the rate. But if you’re on a tight budget and feel strained by the current interest rates, it may be sensible to wait until the housing market cools down.
Additionally, if you don't plan to stay in your home for a while, this may not be the best strategy for you given that refinancing usually comes with fees and it’s often sensible to own the property for a longer period of time to recoup those costs.
Ultimately, marrying the house and dating the rate is a niche strategy that may not be for everyone. At Homewise, we explore the pros and cons of all the various ways you can own a home and make sure you’re picking the strategy that’s right for you. Reach out to our expert Mortgage Advisors now.
