It finally happened. On March 2nd, 2022 the Bank of Canada raised the prime interest rate by 0.25%. This means that for people with a variable rate mortgage the cost of borrowing has started to increase from where it bottomed out at the start of the pandemic. However, there’s no need to panic as the situation is not nearly as dire as it may seem as there are many choices for homeowners, even with slightly higher interest rates. Here are some things to know that will help you keep a cool head in the face of interest rate increases.
First-Time Homebuyers May Have to Adjust
First-time buyers tend to have the largest mortgages relative to their income and the value of their homes. They are also most sensitive to the stringent mortgage application rules, such as the mortgage stress test. The test is a calculation used to check whether borrowers can still afford their mortgage payments if rates increase moderately. The stress test calculation is done using either a benchmark rate set by financial regulators or the offered interest rate, plus 2% – whichever is higher. If you would be approved for your mortgage at the stress test rate, you pass the test.
Provided you can get over the qualifying hurdles, increasing interest rates make it more expensive to purchase a home. It doesn’t mean your dreams of buying a home are over. You simply may have to alter your expectations on the location or the type of home you can afford. Check your budget to determine how much you can comfortably afford today and be realistic about your costs and income in the future, considering we will likely have rising interest over the next few years.
Don’t Panic Over Your Existing Mortgage
The vast majority of Canadians have fixed-rate mortgages, even though most people will save money over the life of their mortgage with a variable-rate mortgage. Regardless, you are insulated from interest rate increases with a fixed rate until it is time to renew.
Even with this most recent rate hike and rumors that more may be imminent later in 2022, variable-rate mortgage holders will still pay less for interest than their fixed-rate counterparts – for now. However, if the thought of rising rates makes you anxious, take a deep breath and keep reading.
Preparing for Higher Interest Rates
Uncertainty is what makes people so nervous about interest rates increases. How much is it going to cost? How fast and how high will interest rates go? How will it affect me? As always, the more information you have, the better you’ll feel. Taking matters into your own hands and arming yourself with the facts will help alleviate the uncertainty so you can move forward and take action if you need to.
Run the Numbers
Find a mortgage calculator and do the math using new interest rate scenarios to know what you’re dealing with. Determine what an increase of 0.25% or 0.5% will make in your actual mortgage payment. While it will certainly have an impact, you may find that the actual dollar amount is less than you thought it would be.
Focus on Overall Interest Costs
Most mortgages allow you to choose a payment frequency, either monthly, bi-weekly, or even weekly. Increasing your payment frequency can actually add up to significant savings over the life of your mortgage. So while changing your payment frequency won’t affect the interest rate, you will save money in the long run.
Look Out for Other Debts
When the prime rate goes up, it also affects the costs of other loans, including car loans, student loans and some credit cards. Get your non-mortgage debts under control to minimize the impact of rising interest rates. If necessary, you can think about consolidation loans or a home equity line of credit. These typically have lower interest rates than other types of consumer debt, so you’ll pay less interest and can focus on paying those debts off sooner.
Canadian homeowners in 2022 have a ton of mortgage options available to them in the form of fixed-rate or variable-rate mortgages, flexible repayment options, and a wide variety of lenders to choose from. In fact, there are almost too many options for most people to consider. That’s why working with a mortgage broker is so much easier than shopping for mortgage options on your own. Unlike your bank or an online broker, your mortgage broker will take the time to understand your financial situation. When they do, they can help narrow the choices and remove the uncertainty to help you navigate your mortgage – even in the face of rising interest rates.