What's the Big Deal? A Baseball Analogy of the Latest Interest Rate Hike.

(Disclaimer; I am not a mathematician nor to I like baseball, however I am a certified mortgage broker and have played slow pitch a few times so that makes me super-qualified to write this post)

Recently, most of the Big 6 Canadian financial institutions announced a slight rise in their interest rates. Most of Canada didn't know about this rate increase because A) it was pretty small, only 1/5 of 1%   B) it's the middle of August when most of Canada is still in Summer vacation mode and who the hell cares C) the CFL and MLB is in full swing and who the hell cares D) you already have a mortgage and don't want to think about it for a few more years but should care.

Granted, 1/5 of a percent isn't much to get excited about. It's like that guy on 1st taking a step off  the base. Maybe he's getting ready to steal second, maybe not. It's pretty far to second. Nobody gets too excited about one little step off the base, right? Canadians have other things to do other than think of real estate.

Canadian Real Estate; (l to r) bank rates, Canada's Minister of Finance, Bank of Canada

However, what if I were to say that little increase is the third rise in rates in the last six months? That little step is actually equal to quite a few steps off the bag. That runner is definitely thinking of stealing second. He's watching the pitcher, the pitcher is watching him.

No, the other Flaherty.

Now imagine the pitcher is Jim Flaherty, the Conservative MP in charge of mortgage rates and such.  He's pitching to the batter, in this case we will call 'the Economy'.

He's thrown a few warning pitches, bringing back the amortization of loans from CMHC from 30 to 25 years, he's warning us about the real estate bubble. The count is 3-1. Then a strike is thrown down the middle this summer and the Bank of Canada rate is still at it's all time low of 1% and the Economy just stares as it goes by. The count is now 3-2.

Some people are getting interested, especially outside investors. It's another quasi-dramatic moment in a game so full of quasi-dramatic moments that you can fall asleep to them, which is what most people not involved with housing or banking do.

Meanwhile, you have that runner (in this case the bank rates) taking quite a bit of a lead off of the safety of 1st base. The economy is hit or miss. The fans are watching the US markets or trying to decide which side is telling the truth in the Syria/Egypt/United States love triangle. Now could be a good time to make that jump to second, right?

Someone looking for a rightie with 15/20 vision?

But what happens if that runner bolts for second which in this scenario is a 1% interest hike? As is, that large lead off is making some fans of the Economy nervous. The pitcher is nervous. According to RateHub there are no fixed rates being offered at under 3% in the Canadian market, the trend is moving up and armchair fans of mortgage rates (all 3 of them) are already looking for rates to be closer to 4-5% by the end of the year. If that runner goes, everybody will forget about the batter, which as everybody knows has the self-esteem of a goldfish on dry land.

But back to the game; the pitcher goes into his wind-up, the runner crouches, ready to go either way. The Economy waits....the pitcher checks first again, kicks his leg back and...

Now the math. As I mentioned, I am not a math whiz so I'm going to keep with whole numbers here and I won't get into the semi-annual compounded interest rates or fractions of a decimal that most interest rates tend to be.

If you wish to buy a house and to buy that house you need to purchase a mortgage at say, $300,000 and the interest rate you had was a fixed rate at 3% (simply stated, no fluctuation or change of rates based on trends) here's what you're looking at;

$1423.20 a month payments for the first five years or until your mortgage is up for renewal.

Now, say you want to buy the same mortgage at 4% here's what you are looking at;

$1578.06 a month payments for the first five years, or until your mortgage is up for renewal.

So that 1% increase equals nearly $155 in extra payments a month which also equals approximately; 2 full 50 liter gas tanks, 1 week in groceries for a family of four, 2 tickets to a Canadian-based NHL hockey game, 1 month in car insurance for an 'average' car, one extra shift a month for someone working for $20/hr, minus taxes.

Basically, that theoretical 1% interest hike just made a home-owners disposable income a lot less disposable.

Things just got interesting, didn't it? So if you are thinking of buying, refinancing, or just have a question drop me a line here.

Thankfully, Willie Mays Hayes has since retired.