Let’s Talk about Mortgage Rate Increases
As you have probably noticed, interest rates have been on the rise for the last two years. While rates are still low, they are not as low as they have been in the past. What does this mean for you?
If you are currently in a fixed rate mortgage, it would be a good idea to develop some strategies on what to do when your mortgage comes up for renewal. One suggestion is to start increasing your payments now. It does not have to be a huge amount but enough that you adjust your budget to account for the potential higher rate at renewal time.
Let me give you an example: If your current mortgage is $300,000.00 with a 5 year fixed rate of 2.99% with payments amortized over 25 years. Your monthly payments are $ 1,418.20 per month.
At renewal, you have 20 years left on your mortgage and the 5 year fixed rate is now 3.59%. Your mortgage balance is now $ 256,374.53 after 5 years. Your payments are now $ 1,495.20 per month. That represents an increase of $77.00 per month on your mortgage.
Connie’s Strategy: Why not increase your payments now and make it an even $1500/month? You will get used to it, and when it does come up for renewal, you won’t even have to change your budget!
This also gives us some perspective. Your payments are not going to shoot through the roof if rates go up.
If you are in a variable rate mortgage, you have already seen your rate go up over the last year and a half. Prior to that, the prime lending rate hadn’t changed in over 9 years! So, it was due for an increase. I went to a presentation today where and Alberta economist was saying that he expects the prime lending rate to increase by .75% by the end of 2019, with the first .25% increase likely to be next week. *Disclaimer-this is an expectation but not a guarantee. If something changes in the economy, like an economic crisis, this rate increase would most likely not happen.*
So, what does this mean for you?
Let’s use the mortgage amounts from the above example, but on a variable rate mortgage:If your current mortgage is $300,000.00 with a 5 year variable rate of Prime-1.00% (today's variable rate). This would mean that your current rate is 2.70%. Your payments are $1,385.60/month.
Let’s say it is the end of 2019, and the prediction came through, and your rate is now 3.45%. Your payments are now $ 1,497.30/month. This represents an increase of $ 111.70/month on your monthly payment.
Connie’s Strategy: Variable rate mortgages...YES...they can be the better option, even in a rising rate environment:
Increase your payments now so they are at $1500/month. You pay your mortgage down faster while the rates are lower and won’t notice a change in your budget if rates go up OR if you don’t want to do that, be prepared for every 0.25% increase in rate, on a $300,000 mortgage, your payments will go up by $36.70/month.
Remember that prime lending rate can go down as well as up, so be committed to riding the wave. Also, understand that it is very unlikely that we would see rates of 8-10% as that would mean the whole Canadian economy is making more money than they know what to do with.
REMINDER: The next Bank of Canada rate announcement is October 24, 2018 and speculation is that we will see a 0.25% increase in the prime lending rate.
This video https://vimeo.com/279581066 by an industry partner explains why I think a variable rate mortgage can be a good choice. However at the end of the day you are the one paying the mortgage payment and need to do what is right for you.
Please contact me if you would like to go over your mortgage strategy. I am here to help!