Higher interest rates affect you by costing more to borrow money; your mortgage rate will increase if you have a variable interest rate. If you are due to renew a fixed interest-rate mortgage, higher rates may also affect your renewed payments. Learn why, here.
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Interest rates are going up.
- With the hope of keeping a recession at bay, the Bank of Canada has raised interest rates to slow economic activity.
- According to Reuters online financial site as of June 2, 2022, the official Bank of Canada policy interest rate of .25% in January 2022 is set at 1.5% now, and will likely rise above 3% by early 2023.
- As of June 2022, the Canadian banks set their Prime interest (and therefore mortgage) rate at 3.20%.
- It is foreseeable that mortgage rates will easily increase to above 5% by 2027.
- The Consumer Price Index (CPI) inflation rate is 5.7% -6%, the highest in 30 years.
- The increases in gas, grocery, and housing prices, and the difficulty in rebooting supply chains, are pushing up the inflation rate.
Mortgage stress tests.
- For many years mortgage applications have been issued stress tests based on the likelihood of a higher rate.
- The mortgage stress test protects current mortgage holders; you should have enough leeway to manage a higher mortgage payment.
- Rate increases are a cyclical strategy to help slow rising costs of living.
On top of a mortgage payment, homeowners must pay insurance, property taxes, hydro, water, food, phone, car payments, gas, vehicle upkeep, clothing expenses, and vacations. Probably the biggest expense surrounding homeownership is property upkeep; there is much to consider, including new windows, HVAC replacement, roofing, sewer repairs, renovations, and yard maintenance.
A 3-year Fixed Rate mortgage of $650,000 compared between 1980 (14.5%), 2018 (5.25%), and 2022 (4.29%)
- 1980 – 14.5% rate cost $7,864.48 per month.
- 2018 – 5.25% rate cost $3,873.47 per month.
- 2022 – 4.29% rate cost $3,719.18 per month.
Examples of a $650,000 mortgage rate during an interest rate increase:
- A foreseeable interest rate increase to 5% by 2027 only slightly increases monthly mortgage payments. A mortgage of $650,000 amortized over 25 years at a 3-year Fixed Rate of 5% interest will cost you $3,780.43 per month.
- A fixed-rate mortgage stays the same for its entire term until renewal. A mortgage of $650,000 amortized over 25 years at a 3-year Fixed Rate of 4.29% interest will cost you $3,719.18 per month.
- A variable rate mortgage means the payment amount stays the same while the overall amount for principal repayment changes. A mortgage of $650,000 amortized over 25 years at a 5-year Variable Rate of 2.7% interest will cost you $3,174.02 per month.
Your payments remain the same, but the principal fluctuates with the prime rate. At renewal time, your mortgage balance will likely be higher.
What can you do to lessen the effect of higher interest rates?
- Pay down your debts. Pay the highest rate debt first, and for many, this is credit card debt.
- Consolidate your high-interest debts into a bank loan. Lower your interest rate, but pay the same amount each month.
- Eat the food you buy. Cut your everyday expenses. According to Sylvain Charlebois, Senior Director of Agri-Foods Analytics at Dalhousie University, 40% of food purchased is thrown away.
- Find ways to increase your income. So many jobs are now remote, so opportunities for freelance work, even during evenings, exist.
- Do not accept the most extensive line of credit or highest mortgage rate you’re offered.
- Avoid taking on more debt.