Tuesday, July 13, 2010

Effect of interest rates on affordability under new CMHC rules

Since April 19th, CMHC insured mortgages must qualify under the posted 5-year mortgage rate.

Here is the evolution of the five year posted rate and the five year bond yield over the past two years.
Notice that the yield has dropped around 3/4 of a point since April, but the mortgage rate has not. I guess the banks haven't passed on their savings--so far anyway.

The 5-year posted rate has changed a bit over the three months since the BIG April 19th CMHC rule change. From 6.1% we have moved down to 5.79%. What impact does that have on the maximum people can pay?

Assume the following. 100K of income. 35 year amortization. 40% total debt service ratio, here interpreted as you can pay 40% of your gross income for your mortgage. 5% down.

With these assumptions at a 6.1% qual rate, you can afford to pay $614,666, comprised of $583,933 borrowed and $30,733 downpayment.

As we have moved from 6.1% to 5.79%, what has been the impact on the amount you can pay, given the above assumptions? See the graph below.

I've put it as an index in the axis, so that percentage change is easier to calculate. I also labeled the first and last points with the dollar value. The ability to pay has gone up by 3.6 percent from April 19th to now.

This graph isn't too exciting yet--but with big swings in the mortgage rate, either up or down, this could be a fun one to look at again in the future.

4 comments:

jesse said...

Thanks, VHB for the graphs. Another related graph I find interesting is plotting interest rate sensitivity, i.e. how a change in rates affects the affordability metric.

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takloo said...

bond yields have declined for the past 3 months by about 75bps but in comparison the 5-year mortgage rate has barely moved down ... about 30 bps

more here on flatenning of yield curve
http://takloo.wordpress.com/2010/07/26/flatenning-yield-curve-canadian-bond-yields-go-down/

& here for spreads on mortgage rates
http://takloo.wordpress.com/2010/07/05/yields-plunge-spreads-explodecomments/