What You Can Do About Your Mortgage When Interest Rates Rise
For a time, mortgages were almost free. Now they are no more
Anyone who has taken out a mortgage in the last two years could be excused for considering this period, despite the global context, as better days.
“During the pandemic, we’ve had historically low interest rates – incredibly low interest rates,” says Renee Stribbell (Human ressources ’97), owner of Your mortgage needsan Edmonton area mortgage brokerage.
“It was kind of a pocket in time. If you got a mortgage back then, fixed or variable, you had your mortgage almost free for a few years. »
That time is over. In March 2020, at the start of the pandemic, the Bank of Canada policy rate – to which most consumer interest rates are tied – was a miniscule 0.25%. Two years later, as the Bank sought to anchor galloping inflation, he began to climb. Then it bolted. In August 2022, it was 2.5%, with more increases likely (as Stribbell expected).
“It’s probably going to get worse before it gets better,” Stribbell says.
What does this mean for current mortgage holders and those looking to get one? Inevitably, anxiety. But Stribbell doesn’t think owners should panic. To help everyone keep calm, we asked the veteran broker to explain the impact of the rate hike and what we can do about it.
To lock up or not to lock up
These days, Stribbell gets calls from customers fearing variable rate mortgages and a good dose of fear. This loan floats with the key interest rate, rising and falling (emphasis on the former). In exchange for the risk, they are less than fixed rate mortgageswhich are fixed for a fixed term, allowing borrowers to access a wider range of the housing market.
Stribbell knows, however, that what rises should calm down. “If you have an adjustable rate mortgage and you panic and lock in at 5% today, and in six months the rates drop to 3%, how are you going to feel about that?” she asks.
(Indeed, at the end of 2018, the Bank of Canada’s key interest rate rose to 1.75% before falling to 0.25% less than two years later.)
Also consider the law of averages, Stribbell adds. “If you took out a variable rate mortgage when prime [the base interest rate charged by banks] was low, you saved a lot of money during this period. Over the life of a mortgage, when rates go up and down, “on average you saved a lot of money.
How to know if you can handle the ups and downs
Lenders determine a customer’s borrowing capacity using a simple stress test, Stribbell says. This financial “what if” examines their ability to handle payments 2% above a given rate or 5.25%, whichever is greater.
Owners with variable rates can do this themselves by doing the math whenever they want to study the impact of higher rates. “Go crazy with this worst-case scenario,” advises Stribbell. What would 6% look like? Seven percent? A online calculator can help explore these hypothetical results.
Be prepared for this worst case scenario
Currently, Stribbell does not anticipate a return to the double-digit interest rates of the 1980s. That said, she wonders if the fallout from today’s spike could be felt just as keenly. Consumer debt in Canada, she points out, is much higher than it was decades ago – on the order of $25,000 per person in Albertathe highest rate in the country.
That means higher interest rates not just on an adjustable rate mortgage, but on everything from auto loans to some credit cards.
“If you have debt outside of your mortgage, work to pay it off first,” Stribbell suggests. Take the difference between your current mortgage payments and the highest amount you can comfortably manage and allocate it to higher interest loans, eliminating them before you have to pay more for your home.
If you’re lucky enough not to have such debt, bolster your financial defenses by funneling money toward building your cash flow or investments, Stribbell says, treating your mortgage as a motivator for strategic saving.
Don’t be fooled by an early renewal
Those with fixed rate mortgages might also consider the Bank of Canada advertisement with concern and thinking of avoiding high rates with early renewal.
Take that thought no further, says Stribbell. Choosing to go from 3%, she illustrates, to 5% makes no financial sense. Take advantage of the lowest rate for as long as you can. Plus, moving would likely result in a costly penalty for breaching the terms of your mortgage.
Meet short-term commitments
If you get a new mortgage and choose a fixed rather than variable interest rate, consider committing to a three-year term rather than five, Stribbell suggests. As we have seen, she says, a lot can happen in just a few years.
Try not to panic
A lot of people, it seems, want you to panic about rising interest rates. There’s no shortage of tension among pundits ahead of an expected rate hike, and plenty of social media drama following the revelation. If you have an adjustable rate mortgage, your lender might even call you to ask if you want to lock in.
All this excitement is not surprising, says Stribbell. It’s not just a financial issue. “It’s moving,” she said. “It’s your house.”
When it comes time to weigh your options, “it’s important to take a step back. Take a step back, do some revision, take a deep breath.
Turn off your social media feed, call a professional — a mortgage broker or a financial planner — if you want advice. Above all, pause to take stock. Let your own budget be your guide, not public opinion and predictions.
“The panic is generalized, but it’s not individualized,” says Stribbell. “You must do what is good for you.”
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