Interest rates, set by the Bank of Canada, significantly influence mortgage rates and affordability. Understanding how changes in these rates can affect your mortgage is crucial when navigating the housing market. This guide will help you understand the impact of rising interest rates on mortgage rates and affordability.
- Understand the Basics
First, understand what interest rates are. The interest rate is the cost of borrowing money. When it comes to mortgages, two types exist – fixed-rate and variable-rate mortgages. Fixed-rate mortgages have an interest rate that remains the same throughout the term, while variable rates fluctuate based on changes in the lender’s prime rate.
- Recognize the Connection between Interest Rates and Mortgage Rates
The Bank of Canada’s rate often affects the prime rate offered by banks. When the central bank increases its rate, financial institutions usually follow suit, which ultimately impacts the interest rates for variable-rate mortgages and new fixed-rate mortgages.
- Impact on Mortgage Rates
Rising interest rates lead to higher mortgage rates. If you have a variable-rate mortgage, an increase in interest rates means your mortgage rate will also rise. If you’re about to secure a fixed-rate mortgage, a hike in interest rates will mean securing your mortgage at a higher rate.
- Impact on Mortgage Payments
For variable-rate mortgages, higher interest rates mean that a larger portion of your payment goes towards the interest rather than paying down the principal. This could result in higher monthly payments.
- Impact on Mortgage Affordability
Rising interest rates mean higher borrowing costs, which can reduce the amount a lender is willing to loan you. As a result, you may have to look at less expensive properties, extend your mortgage term, or increase your down payment.
- Stress Test Implications
In Canada, borrowers are subject to a stress test, ensuring they can handle a rise in interest rates. With higher rates, the qualifying rate for this test also rises, making it harder for some to pass the stress test and secure a mortgage.
- Plan for Rising Rates
If you’re planning to get a mortgage or if your mortgage is up for renewal, consider how an increase in rates might affect you. A financial advisor or mortgage broker, like Shelto, can provide valuable advice based on your situation.
- Consider Locking in a Rate
If you anticipate that rates will rise, and you’re planning to get a mortgage soon, consider locking in a rate. Some lenders offer rate locks, allowing you to secure a specific interest rate for a certain period before your mortgage starts.
- Refinancing
If you already have a mortgage and rates are rising, it might be worth considering refinancing. This involves breaking your current mortgage and starting a new one. The goal might be to secure a lower interest rate or switch from a variable to a fixed-rate mortgage. Consult with a professional to determine whether refinancing costs outweigh the potential savings.
- Mitigate the Impact
Aside from refinancing or locking in a rate, you can mitigate the impact of rising rates by increasing your down payment, reducing other debt, or choosing a property that’s well within your budget.
- Seek Professional Advice
Work with a mortgage broker to understand your options and find a mortgage that suits your financial situation. A mortgage broker, like Shelto, can provide valuable guidance, help you navigate interest rate changes, and ensure you make informed decisions.
Rising interest rates can have a significant impact on mortgage rates and affordability. However, with careful planning, strategic decision-making, and professional guidance, you can navigate these changes successfully. As always, Shelto is here to help you understand the mortgage landscape and guide you through the process every step of the way.