Yes, interest rates are beginning to rise but what effect does this really have on your mortgage payments?
If you have a fixed rate mortgage, and say you “locked-in” at a rate of 3.79% for a 5-year term, you will pay this same rate over the entirety of the term. No surprises. No changes to your payments even when interest rates rise. A fixed-rate mortgage offers you peace of mind by knowing exactly what your monthly mortgage payment will be.
If you have a variable rate mortgage, it changes in response to the Bank of Canada’s interest rate decisions, as financial institutions tie their prime rates to the central bank’s benchmark rate. With a variable mortgage, your interest rate rises and falls as the prime rate rises and falls.
Think of a mortgage as any other product you might buy. A business, to stay in business, must sell you a product for more than they paid for it. The difference is their profit. A lender profits on your mortgage because you pay more in interest (the price it charges you) than what they pay to borrow the money themselves (their funding cost, what it costs them).
When the Bank of Canada raised its policy rate by 50 basis points what happened to your mortgage payments?
A 50-bps rate increase translates roughly into a $25 higher monthly payment per $100,000 of debt, based on a 25-year amortization. That is $6 more a week. Should you be concerned, that depends on your ability to adsorb these increases?
The Bank of Canada has indicated that “interest rates will need to continue to rise” to slow inflation that is being driven by rising energy and food prices, and supply disruptions, in combination with strong global and domestic demand. In June, many financial analysts believe the lending rate will increase by another 50 basis points. That’s another $25/month per $100,000 of debt.
What should you do?
Given the current economic climate and how quickly interest rates have been climbing, choosing a mortgage that you can afford today, and tomorrow is crucial.
Should you flip from a variable rate to a fixed one?
We know that the choice between a fixed or variable mortgage is not an easy one. Historically a variable mortgage was a better option but, is it the right option for you today? This decision will have long-term consequences; the difference could be in the thousands of dollars.
Call us at North East Mortgages, and we will sit-down with you to discuss what options are available to you. You are under no obligation, call today.