Planning for Higher Mortgage Rates
As the Canadian economy strengthens, it’s reasonable to expect that interest rates will rise. We just don’t know when they will go up or by how much.
For homeowners, rising interest rates mean that the cost of mortgages would go up. That could be a concern for anyone who is stretched to afford their home at low mortgage rates. However, there are ways to prepare yourself now so that if rates do go up, it doesn’t have to become unmanageable.
Learn more about the impact of potentially higher interest rates and how to prepare at ingdirect.ca/monitor.
We’ve been in a low interest rate environment for a while now, which has been great for homeowners. Low mortgage rates translate to low mortgage payments, and that makes home ownership more affordable.
However, when the cost of borrowing money is very low, consumers tend to borrow more, and carrying more debt can be risky. If homebuyers push themselves to the outer limits of what they can afford with a low rate mortgage, then a rise in interest rates could drive their carrying costs beyond what they can manage.
No one can say for sure when rates will go up. But it’s generally agreed that they are bound to head upwards eventually. That’s the reality of a strengthening economy. What we’re left wondering is, “How rapidly will rates rise?” and, “When will this happen?” In the absence of answers to these questions, the smart approach is to do what we can now to put ourselves in the best position no matter what future rates are like.
First Time Homebuyers
As you shop for your first home, one way to prepare yourself for potentially rising mortgage rates is to shop on a modest budget. Regardless of what size mortgage you might get pre-approved for, instead of borrowing as much as you can in order to buy the most expensive home you can afford right now, take a more conservative approach. See what you can purchase without spending as much, and be really honest about what your actual needs are.
The Impact of Higher Rates on Mortgage Payments
If you have a low interest rate on your current mortgage, consider how rising rates could impact your mortgage payments. With a variable rate mortgage, during your current term, your rate will go up if the prime rate goes up. With a fixed rate mortgage, your rate will hold steady during your current term, but at renewal, you could face a higher rate. Here’s an example of how a 1% increase could affect mortgage payments:
Mortgage Amount = $200,000; Term = 5 year fixed; Amortization = 20 years Old Rate = 3.39%; New Rate = 4.39% Monthly Payment at Old Rate = $1,146.23 Monthly Payment at New Rate = $1,249.21 Monthly Increase = $102.98
In the above example, a 1% interest rate increase translates to monthly mortgage payments that are over $100 more per month. That could put stress on household finances if there isn’t a cushion to handle the extra cost.
Preparing for Higher Potential Rates
To help you prepare for higher potential rates down the road, take a look at your monthly expenses, and see what you can trim. Wherever you manage to cut costs, set aside what you would have spent, in order to create a savings cushion for yourself. It’s also a great idea to set up an automatic savings program that will regularly move some of your money into a savings account, where it will earn interest and grow.
If your mortgage allows you to make extra payments, it’s a smart idea to prepay as much as you can while rates are low. Usually, prepayments are applied directly to your mortgage principal, so these extra payments help lower your mortgage amount, which can mean that your mortgage payments going into your new term may not be as high.