Canadian real estate prices aren’t just getting more expensive, the cost of carrying a mortgage is as well. It’s often said that “the power of compound interest is the most powerful force in the universe.” Mostly, from people in finance, looking to explain how interest accumulates over time. That’s great for people lending the money, but not so much for those that are borrowing it. As interest rates rise, so do mortgage rates. Despite the seemingly small increase in mortgage rates, the hikes will add up to quite a bit. To explain this, we ran some numbers to help breakdown the final cost of these loans.

## About The Calculations

In order to run these numbers, we had to make some assumptions about the rate, and the term length. For the rate, we used the Bank of Canada’s average 5 year fixed mortgage rate. Yes, some people can get a cheaper mortgage rate, and for them – awesome job. You’re also much more likely to secure a lower rate from a mortgage broker. However, the majority of people use one of the big banks, and pay a premium that works out to tens of thousands more for the privilege. This makes the average rate a little higher than you should actually pay. We’re going to use the average, but hopefully you’re smart enough to shop around for a lower rate.

For term length, we used a 30 year amortization and assumed the mortgage rate would be the same for the whole length. In the US, this would be totally normal because you can get a fixed rate for 30 years. In Canada, the length of a fixed rate mortgage is typically 5 years. At the end of that 5 years, you get to play rate roulette – and will end up paying whatever the rate is at renewal. There’s a chance that rates might be lower at renewal, but we’re just above historic lows. Odds are they will be higher in the future, so the cost of interest in these calculations are likely underestimated. Got it? Onward!

## Where We Are On The Rate Roller Coaster

Currently rates are doing a minor climb, but we’re just off of the all-time lows. Today’s average 5 year fixed rate is 4.99%, which is a 7.54% increase from June 2017. June 2017 was an all-time low, and the likelihood of it rolling back to that number is probably gone. However, this time 5 years ago, the rate was 5.24%. These numbers don’t sound all that different, but you’ll see what a big impact this will make on your bottom line at the end of your mortgage.

*Source: Bank of Canada.*

## The Cost of Carrying A Million Dollar Mortgage

Some people say the cost of home doesn’t matter to people, only the cost of carrying that home. For a $1,000,000 mortgage, at today’s 4.99%, you’re looking at a ~$5,362 payment per month, just for interest and principal. That’s about $200 more per month, or 4.11% more than the all-time low in June 2017. If rates rise to where they were five years ago, you would be paying an extra $153 per month, which is a 2.85% increase from today. That sounds like just a few extra bucks, but it adds up to serious amounts of cash.

*Calculated using the average 5 year fixed rate, assuming a 30 year amortization, and the same interest throughout amortization. Only includes mortgage and pricipal payments, so you’ll have to add taxes, etc. yourself. Source: Bank of Canada, Better Dwelling.*

## Total cost of mortgage principal and interest

Borrowing a million dollars for your mortgage? At today’s 4.99% mortgage rate, you’ll have paid a total of $1,930,359 on the interest and principal in 30 years. That’s right, it will cost you $930,359 in interest on that million. If rates were at the all-time low hit just a few months ago, you would have paid $854,135 in interest. That tiny bump in mortgage rate costs $76,224. If the mortgage rate jumps to where it was five years ago (5.24%), you’ll have to pay $985,704 in interest, $55,345 more than today. Yes, if rates climb up to where they were 5 years ago, you’ll have to pay back almost a million on the million you borrowed.

*Estimated interest paid after 30 years, when borrowing $1,000,000. Source: Better Dwelling.*

Remember, this is likely a lowball estimate of interest costs. Once again, we’re assuming a fixed rate for the whole term, at some of the lowest rates in history. As rates climb, so will the interest paid on your loan. If you’re in the market for a home, ask the to lender to run the total cost at your stress tested rate for a better idea of what you’ll pay.

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Thank you for this. We bought last year and are having a few regrets, especially after being told that amortizing for 30 years would make it more “affordable.” If someone explained a mortgage this way, I would have definitely would have reconsidered.

On top of that, there’s condo fees, property taxes, insurance. It’s really mind boggling how much the hidden costs of owning add up to.

On the upside, interest rates are likely going to be cut when the economy gets the legs kicked out from under it. Hopefully you’re on a variable rate.

When do you project interest rates to be cut? right now we are trending towards increases.. Inflation is somewhat stable and the government is trying to guide the housing market into a soft landing, as exuberance in the market is now trending down. Projections are that interest rates will climb to 4-5% by 2020 and housing prices will fall. I am just wondering if your “economy gets the legs kicked out from under it” is speaking towards what is to come in housing or is there alternative means to a recession i.e. tech, oil, NAFTA, or our dollar.

I’m legitimately curious as to how someone could go through the process of buying without fully understanding all of the costs. So many people seem to get so swept up in the assembly line of realtor, broker and lawyer that they don’t actually understand what they’re doing when making the biggest financial decision of their lives.

If you have a fiduciary relationship with your realtor (which everyone should as I understand it), they’re legally not allowed to advise you to afford something you can’t.

There’s a reason people say it’s a lifestyle choice. If you’re actually buying a home as an investment, you need to tally *all* of the costs. If you bought a home 20 years ago, and you’re like “I sold it for double!,” you likely lost money on carrying it. There’s a reason most fund managers that are relatively young rent.

Just to give some perspective: Let’s say your mortgage is 80% of purchase price, which means you buy at $1.25MM. To break even with interest costs (conservative estimate considering discount rates are at ~3.2%), the property must appreciate a minimum 1.5% per year for 30 years. Since October ’97 and October ’07, the average home price (all unit types) in the GTA has appreciated 6.5%/yr. and 7.2%/yr. respectively. If we expect this level of appreciation to continue for the next 30 years, the current interest cost will not have a material impact on value erosion.

Let’t take it a step further. If we factor in yearly property taxes, insurance, gas, hydro, water, and home repairs/maintenance, estimated costs including mortgage interest is ~$1.265MM total over 30 years. Given the $1.25MM purchase price, the value of the home must appreciate a minimum of 2.00% per year, which is still lower than the 10 and 20-year average annual home appreciation in the GTA mentioned above.

This will obviously change if the interest rates continue to rise (will have an impact on value and costs) but I just thought I’d add some perspective.

Also, this will obviously change if you choose a time frame that excludes the bubbly craziness of the last several years. You know… just to give some perspective.

The 10 & 20-year time periods also include the ’08-’09 recession – should I exclude that as well?

FYI, excluding the “bubbly craziness” the past few years, the average annual appreciation is 5.0% from Oct. ’97 to Oct. ’14 and 4.2% from Oct. ’07 to Oct. ’14. How’s that for perspective?

For a better perspective, how do the inflation adjusted numbers from 1989-2014 look?

Interesting question. Why don’t you enlighten us?

Mario, excellent perspective and thanks for sharing. I’m not sure what MH’s issue is. Even if you took a 50 yr historical view, real estate appreciation is approx 5% which is more than adequate. In general, lets not forget the difference between a primary residence vs investment property. The former being a liability (unless you have an income generating suite-s) and the later being an asset (provided rental income covers all costs). Thus, the carrying costs we are talking about here differ… If it’s a primary residence for your family to enjoy, there are intangible benefits associated with ownership (parks, schooling, lifestyle in general). I find many just lump the two types of real estate and their associated costs into one bucket.

Really exaggerated, the average mortgage in Canada is about 200k.

Using 5% too high.. Big 5 hold the majority marketshare of mortgages-but that doesn’t mean everyone gets hosed with a 5% fixed rate now. Your estimate on BOC rate WAY too high.

Also who gets 1m dollar mortgages? You need income over 200k to qualify for that, maybe possible with two high dual income individuals. (plus you need 20% down and closing costs, because no more CMHC on sub 1m homes…

So basically extremely small portion of population in Canada will fill your scenario.

You sound like one of those people that are terrible at math. Pretty sure the takeaway is if you buy at today’s rate, you’re paying twice the price for whatever you borrow.

Additionally, in 2008 the average mortgage was $200,000 in Canada – the last number stats can released. You’re telling me buyers from them to now didn’t borrow more than that? In Vancouver, the average price for any home is over a million. Even foreign buyers aren’t paying all cash. There’s more debt than you think, and it’s heavily concentrated in BC and Toronto’s real estate buyers over the past few years.

> “You sound like one of those people that are terrible at math. Pretty sure the takeaway is if you buy at today’s rate, you’re paying twice the price for whatever you borrow.”

Did you think before typing that?

Firstly, your using the Bank of Canada average of 4.99%. You say the majority use the big banks and pay a premium for the privileged. I would be shocked if you could find me one person in Canada, who obtained a mortgage from one of the big banks over the past 5 years, where the rate on a 5 year fixed / closed term is 4.99%. This does not represent the discounted rate everyone actually pays. Let’s assume 3% as the average over the last 5 years. Sorry, I don’t have the actual percentage but given it’s only been of late that the discounted 5 year is above 3%, I think its errs on the side of caution. Based on 3% / 30 year amortization, on a $1000000 mortgage, the monthly payment is $4216 / month. Of this lets say $2450 is interest (which in reality drops below $2450 for interest on the 11th payment of the 1st year). Yes, there are additional condo fee’s and property tax. Let’s assume the condo fee’s total $550 / month, bringing the total cost of carrying $3000 / month. The alternative would be rent where you never see any appreciation in property value which, if it’s your primary residence, is tax free. For a property requiring a mortgage of $1,000,000.00, what do you think the rent would be for this property? I would guess more than $3000 / month.

You understand that the average is the *average* of what people pay, right? How often do you talk mortgage rates with your friends and family? How often do they tell the truth? The BoC takes the actual average from the documents used on the mortgages.

The number isn’t a BS Statistics Canada survey number, or a sketchy mortgage broker going “I know what everyone is paying,” even though Mortgages Canada has no clue what brokers are doing.

@Michael Z –

Well lets see. The “average” of what people pay, based on my understanding of the word average or median, would mean to use 4.99% as the “average”, there are a good number of people well above 4.99% and also a good number below 4.99%. The later I believe. For the one’s paying more than 4.99%, they must have all gone to sketchy brokers who “knew what everyone was paying”.

If fact, the 4.99% is not an average. It’s simply the posted rate, which oddly matches the stress test rate lenders are required to use for qualification purposes. If the article spoke of what consumers would now qualify for on purchases a million and above, I would be talking to my friends and family about interest rates instead of commenting.

The only thing that I can not dispute from this post is:

As interest rate go up, so does the amount of interest you pay. Well that make perfect sense. I’ll be sure to let Mortgage Canada know…. who ever Mortgage Canada is.

@ahmed transunion reporting average mortgage in Canada now 200k from all their files back in August 2017 so this is fairly recent …also pretty sure you need income of almost 220-240k to qualifiy for 1m mortgage after putting 20% down lol I know people lie about their income, but let’s be realistic here… That is far from average.

@michael z

It’s based on the chartered banks rate, most likely their “posted” rate. This is Not the same as market or average rate. This is just an inflated rate they use as benchmark to calculate “breaking your mortgage ” penalties.

In over 10 years I had several mortgage terms with big 5. Many renewals, even if I ignored bank letter and accepted default rate, no where was it ever near 5% during this time. So assuming I was dummy public, it’s not possible to pay that much. Banks might hose public Joe blow @ 1% over competitive broker rate, so like 3.5% in last 5 years. Far cry from saying average is 5%, lol

The only way this is possible is if you think sub prime is included, well big 5 own 80% market I recall so that’s not happening.

The lesson of this story is not that everyone has 1m mortgages @5% rate, but many people would be in trouble if monthly payment went up and extra $100-300 month, especially since they have mortgage rate at historic lows and most have all net worth in their house…it IS very possible rates could double from 2% range to 4-5% now we are in economic expansion not depression anymore. Why do you think Ofsi said they are not waiting for risks to “crystallize” and impli,meted stress test.

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