Rising interest rates are a front-of-mind topic for most Canadians. Not only can increased rates affect unsecured consumer household debt — like credit cards, some lines of credit, and old bills — but it can also affect secured debts — like your mortgage renewal.
On July 11, 2018, the Bank of Canada increased interest rates to 1.5%. This is the highest they have been in nearly 10 years. Experts are predicting that interest rates will continue to rise throughout 2018 and 2019.
On an immediate basis, the rising interest rates affect variable-rate mortgages (mortgages that fluctuate depending on interest rates) more than fixed-rate mortgages. But even if you have a fixed mortgage rate, you will likely still be affected when it’s time for mortgage renewal.
As interest rates have gone up, so have mortgage rates. Most banks have increased their prime lending rate. When you go for mortgage renewal, you may need to renew at a higher rate than you had previously paid.
Take the following example, for instance:
You have $500,000 remaining on your mortgage and plan to renew at a five-year fixed rate with a 25-year amortization at 2% interest.
According to Ratehub.ca’s online mortgage calculator, your monthly payment would be $2,117.
Now let’s say that you renew the same mortgage, but this time it is at 4.5% interest.
This would result in a monthly payment of $2,908 — nearly $800 more.
Over the year, you would be spending almost $10,000 more — or $50,000 more over five years. That’s a big difference.
And rising interest rates aren’t the only thing that could be affecting your mortgage renewal rate. At the start of 2018, a new mortgage stress test came into effect in Ontario for uninsured mortgages.
Most mortgage renewals won’t have to undergo the stress test if they are staying with the same lender, but if you decided to switch mortgage lenders at renewal, you might be faced with it.
If you are facing a mortgage renewal and worried about increased prime lending rates, what can you do?
- Talk to your mortgage lender. See what kind of rates they are offering and what you might be able to secure.
- Consult a financial advisor. Even if your existing lender’s rate is going up, it might still cost less than switching to another lender. You need to weigh the options.
- Take a look at your household budget and current debt levels. If you won’t be able to afford a higher mortgage rate, you need to see where you can secure more funds or consider debt consolidation options — potentially even filing for a Consumer Proposal to deal with your non-mortgage debts.
If rising mortgage rates are causing you concern, Fuller Landau Debt Solutions can help. Our experienced team of Licensed Insolvency Trustees can go over your mortgage options with you and assess your household debt levels to make the best choice for your financial future.
Contact us today for a free consultation. Call (647) 952-6081 or visit www.fullerdebt.com.