You've read the news reports and heard the analyst reports. They say that interest rates are about to begin rising. In January, the governor of the Bank of Canada stated as much. And the United States and other countries have also signalled that interest rate hikes are coming soon. Most Canadian homeowners can handle slight and periodic increases in mortgage interest rates. That's because our mortgage qualification rules, such as the mortgage stress test, aim to ensure people can still afford their mortgages in the event that rates begin to rise.
However, the mortgage stress test and other precautionary measures can't take into account whether people's employment situations, non-mortgage debt levels, or other financial factors have changed. So, for some homeowners, higher mortgage rates will be cause for concern.
We know rate hikes are coming, but there's no need to panic. Instead, prepare now to lessen the impact later. Here are a few tips you can consider to get ready for higher mortgage rates.
Increase Your Regular Payments
Most fixed-rate and variable mortgages include options to repay to pay a little extra in each of your regular payments to help reduce your principal faster. They are sometimes referred to as accelerated payments, and they allow you to increase your payment up to a stated percentage.
Choose to increase your payment now, before interest rates increase, so you can adjust to the higher payments. Then, when it is time to renew your fixed-rate mortgage, the higher interest won't feel like such a shock.
For variable-rate mortgages, you'll have a choice when interest rates increase. Either keep the accelerated payment if you can manage it comfortably or reduce it to the minimum, so your payments stay relatively stable until the next rate hike.
Convert to a Fixed-Rate Mortgage
Variable interest mortgage rates will rise each time the prime rate increases. You may feel that after one or two increases, you're approaching the limit of what you can afford. In this case, you may want to consider converting your variable mortgage to a fixed rate. Most variable mortgages offer this option as a safety net for borrowers. The fixed rate will be higher than your current variable rate, but you'll get some protection and peace of mind that you won't be impacted by further rate hikes.
Shop Around for Better Rates and Terms
While we know that rates are likely to increase soon, they haven't done so yet. Shop around to see if you can get a good deal on a new mortgage and lock into a new term now. You'll want to compare payment amounts. You'll also want to calculate the overall cost of the mortgage to know whether you'll save money in the long run. Don't forget to take into consideration any early breakage fees that might also apply if you move your mortgage before the end of the current term.
Consolidate Other Debts
Interest rates change also affect other types of loans, credit cards and lines of credit. Before the rates rise, look to consolidate some of your other debts to reduce your overall interest. Refinancing your mortgage or getting a secured line of credit with a lower interest rate can save you some money and protect you from rate increases.
Whatever happens to interest rates this year, don't panic. While experts are forecasting multiple rate hikes, increases tend to be slow and steady so as not to put excessive pressure on the economy. Even with a variable rate mortgage, you may be able to handle several small increases before it becomes uncomfortable.
While these are some possible tactics you can use to prepare for interest rate increases, not all will be the right fit for you. Call a mortgage broker who can help evaluate your options, ensure you're comparing apples to apples and choose the mortgage that best fits your finances and your goals for repayment.