There is a lot of news and action in the mortgage industry as of late with the Bank of Canada increasing interest rates in effort to control inflation and ease the housing market.
This is a great opportunity to understand what it means to you as a client in the industry, so here is a summary, we hope you find this information helpful.
Variable Rate Mortgages
Clients with Variable Rate Mortgages (VRM) will likely not see an increase in payment, however be aware that the amount of payment going to principal will decrease and the amount to interest will increase. Many lenders will allow you to increase your payment so it’s a great time to talk to your lender if you are unsure of the allowable amount. By increasing your payment to a “pay like a fixed”, more money can go directly to your principal.
***Please note*** If the prime rate goes up before you have signed your mortgage documents with your lawyer the change will be adjusted in your payment to reflect the increase. This will increase your payment from that in your commitment .
Adjustable Rate Mortgages
Clients with Adjustable Rate Mortgages (ARM) will receive word from their lender that their payments will increase, based on the changes to the lender’s prime rate. See example at the end of this blog.
Fixed Rate Mortgages
If you are locked in with a fix rate you have no worries on any of these rate changes until you have to renew your mortgage or sell your home. If you have to break a fixed rate term there is the dreaded and very expensive Interest Rate Differentials (IRD). With interest rates on the rise there is now a smaller difference between the contract rate and the posted rates which is used to calculate IRD. This may default the penalty into a 3 month interest penalty instead of the IRD as lenders will use whichever one is greater.
In Summary, if you are in a VRM or ARM mortgage and have received a discount off of Prime rate of approximately 1% you are still in a great position even with the prime rate on the rise.
Example based on a 5 year term, 25 year amortization, $500,000 mortgage.
Fixed rate of 3.74% payment would be $2560.11. If you choose a VRM or ARM with a Variable or Adjustable rate of Prime - 1% (based Prime of 3.2%), the discount is a payment of $2165.83.
If the Bank of Canada increases rates again in June, another 0.5% would increase your payment to $2289.94 if you have an adjustable rate mortgage.
Pro tip! If you increase your monthly payment by 10%, that amount goes directly to your principal and your payments would be $2578.94. This is very similar to what they would be with the fixed rate except you would be paying your principal down faster!
Have questions on how these changes specifically affect your mortgage payments and contract? We are here to help!!