There have been many new articles lately that talk about rising interest rates and what that will mean for Canadians. Some believe that this is a way for the government to stress test loan delinquency rates in the country since a rise in interest rates leads to higher monthly payments. Others simply believe that since the economy is looking up, so too are interest rates.
Whatever the reason, the reality is that the Bank of Canada has increased interest rates for the first time in seven years, from 0.5% to 0.75%, and this will affect interest rates on your mortgage.
How Exactly Will The Interest Rates Increase Affect Your Mortgage?
As a current homeowner, you need to prepare for a higher interest rate when you renew your mortgage. If you locked your mortgage rate in three years ago, in two years you will likely need to prepare for a higher mortgage payment. According to a The Globe and Mail article, fixed rate mortgage costs started to rise in early August and variable rate mortgages will be affected later in the year.
For those who have borrowed $100,000, the recent hike would increase your monthly payment by $21, which is a manageable sum for most. However, larger debts with variable rates could become significantly more costly in a year’s time if, for example, we see two more hikes.
A $400,000 mortgage debt with a variable rate could involve $250 more in monthly payments, for instance. That’s a grocery bill for many families and over 12 months, it is an additional $3,000 that needs to come from somewhere.
Protecting Yourself Against the Risk of Higher Interest Rates
For those who fear the higher costs associated with higher interest rates, there are ways to help protect yourself. For example, you could pay down your principal faster by shortening your amortization rate (the number of years you have committed to paying off your mortgage).
In addition to that, this could be a good time to take a hard look at the monthly bills to find far greater savings. Where are there savings that can save you money and invest back into your mortgage?
You could also refinance your mortgage by lowering your current interest rate and cosolidate those higher interest debs, such as LOC and credit cards, thereby lowering your overall interest rate.
The more effective you are at reducing your total household debt load, the less vulnerable you are to the cost of borrowing which will likely gradually move higher in the coming months and years. You can give us a call to take advantage of the current lower interest rates and consol your higher interest rate.