The Bank of Canada has raised interest rates several times since 2022, leaving many Canadians wondering how, and when, their mortgage will be impacted. That’s why we put together this quick guide about how prime rate increases affect interest payments on mortgages and loans.
How will this affect my mortgage and how can I prepare?
Mortgages are especially vulnerable to interest rate increases. Their large outstanding balances ensure that even minor changes to rates can amount to significant differences in principal and interest payments.
By doing the following, you can feel confident that changes to your mortgage rate won’t interfere with your long-term financial plans:
- If you have a variable rate mortgage, consider increasing your payments. As interest rates climb, less is paid towards the principal, and more towards the interest, on variable rate mortgages. Left unchecked, rate increases can leave you owing more at the end of your mortgage term than you initially intended. You can make sure this doesn’t happen to you, either by increasing your monthly payments, or by switching into a fixed-rate alternative.
- Consider the benefits of a fixed-rate mortgage. They offer consistent interest rates that will remain unchanged for the duration of the term, and peace of mind from knowing that big market movements won’t upset your homeownership plans.
- It’s worth spending time with your lender to evaluate the variable market cycle. It’s always better to make a conscious decision to do nothing, rather than making no decision at all. If you can afford it, it may be beneficial to increase your payments to ensure a lower renewal rate. Your payments could increase on a higher principle than you’re expecting, and not altering your monthly payments could have long term implications to the total amount of interest you pay over time. Long story short: if you don’t increase your monthly mortgage payments, you could be looking at a longer repayment timeline than you originally thought.
How will rising interest rates impact my loans?
The most immediate impact from rising interest rates can be seen in any variable rate product such as a line of credit or a mortgage. For someone who owes $100,000 on one of these products, a 25 basis point increase in interest rates translates to a $250 annual increase in borrowing costs.
With forecasts ranging from 50 to 150 basis points expected increases over the next 18 months that same borrower could face $40 to $120 increase in monthly interest charges. For the borrower, that means either coming up with additional funds every month, or in the case of a mortgage not paying down your principle as quickly as you would at lower interest rates.
*This is just an interest calculation that does not include principal payments
We’re here to help.
If you’re still unclear what this could all mean for you, connect with one of our advisors. We’re on standby to help you make sense of these rate hikes and feel confident about your finances. Call us at 1.888.517.7749 or book an appointment online.
