Two major banks in Canada have raised their mortgage rates and other lenders are expected to follow suit. While the rate jumps weren’t huge, Canadians could be in for more increases over the next few years, getting mortgage interest rates up to a more “normal” rate. Currently, even with the increase, rates are at a historic low. Being under 3%, it was only common sense that the rates would eventually rise again.
What does this mean for homeowners?
If you have a closed, locked-in mortgage, these new rates won’t affect you until it comes time to renew. The amount that a mortgage holder will pay with increased mortgage rates depends on the size of the mortgage and the length, as well as the term. A mortgage holder with a mortgage of $300,000 for 25 years and a five-year term will see their payment jump by about another $50 a month with this increase. While that may not be a huge amount, it will add up over the life of the mortgage, with tens of thousands of dollars in extra interest costs paid out. Obviously, those with larger mortgages getting closer to $1,000,000 will see their payments increase by quite a bit more monthly when they renew.
What can you do to pay less interest?
If you haven’t bought a home yet, now is the time to buy to lock in at the lower interest rates. Home prices may be higher, but it is estimated that home prices may continue to rise or stagnate, but we know that interest rates will definitely rise. Your best bet is to buy a home that you can afford, even if the interest rates do go up. Under the new mortgage rules, first-time homebuyers are required to do a stress test to determine just this. Even still, it is up to you as the homebuyer to ensure that you can afford your payments for the entire length of your mortgage.
If you already own your home, trying to pay down as much on the principal as you can while your interest rates are still low is a good idea. That way, when renewal time comes you may be able to renegotiate your payment based on your lower principal, the value in your home and the higher interest rates and effectively have the same payment amount each month. If you aren’t able to make large payments to the principal, it is best to talk to your lender about increasing your term, so your payments aren’t overwhelming at the higher rate.
If you need any help or more information, contact me.