First-time homebuyers need to think ahead

(August 25, 2005) Potential new homebuyers appear unfazed by the prospect of higher mortgage rates, perhaps because few of them understand the long-term effects, according to a report from a leading realty firm.

In a survey by Royal LePage, new homebuyers and potential buyers were asked: “If you have a $150,000 mortgage and the interest rate increases from 5% to 6%, approximately how much more would you pay over the next 10 years?” Only 18% of respondents correctly estimated that such an increase would cost them between $10,000 and $15,000. The largest group, 39%, had no idea at all.

“First-time buyers are well aware of the possibility of interest rate increases and factor them into their decision to buy, but their awareness on how an interest rate increase could affect their future finances is surprisingly low,” said Phil Soper, president and CEO of Royal LePage Real Estate Services. “We encourage first-time buyers to take both current and future financial needs into account.”

Despite steady price increases in recent years, low interest rates have helped keep homeownership affordable, according to economists at Scotiabank, which also participated in the study.

“Nonetheless, with interest rates expected to drift modestly higher over the coming year, it’s important that first-time homebuyers have a strategy in place to properly structure their borrowing,” said Charles Lambert, managing director of mortgages at Scotiabank.

The survey also found a trend toward condominium purchases among first time homebuyers. Ten per cent new purchasers over the past five years opted for condominiums, with 21% of potential buyers saying they intend to go the condo route.

The popularity of bungalows appears to be on the decline, with only 25% of potential buyers intend to buy one, compared to the 33% who bought one in the past five years.

The overall market is expected to cool somewhat, compared to the frenzied buying of 2004. Among renters who never owned a home, 37% said they would potentially purchase in the next three years compared with 42% last year.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com