Yes, it’s true. In case you haven’t heard all about it already, on December 7th the Bank of Canada raised the policy interest rate by 50 basis points and increased it’s target for the overnight rate to 4.25%, with the Bank Rate at 4.5%. Ok great, but what does it all mean!?
– If you haven’t made a purchase yet, your borrowing ability has likely decreased by 6-8%.
– 5 year Fixed term rates are hovering around 5.5% currently.
– If you have an Adjustable Rate Mortgage (meaning your payment increases/decreases depending on interest rate changes), your mortgage payment has increased by approximately $30 per every $100,000. (Ie; you have a $500,000 mortgage, your payment just increased by $150/ per month.)
– If you have a static Variable Rate (meaning your payment doesn’t change but the interest to principal ratio of your payment changes), there is a chance you will hit your ‘Trigger Rate’.
– The ‘Trigger Rate’ is the interest rate at which the interest portion of your payment equals the total payment amount (at which point you run the risk of paying interest on interest).
– If you hit your Trigger Rate, your lender may automatically increase your payment, extend your current amortization, or request manual lump sum payments.
WHAT CAN YOU DO?
– If you haven’t made a purchase yet, you may want to speak to your mortgage broker about locking in for a term shorter than 5 years, and then refinancing when the rates are lower. If you do lock in for a 5 year term, see if you can negotiate lower penalties for breaking your term early and refinancing.
If you are on a Static Variable or Adjustable Variable:
– Utilize mortgage prepayment options to make extra payments to your principle, lump sum payments, or double up payments to avoid your amortization extending past 25/30 years.
– Change your payment frequency to biweekly.
– Contact your broker about refinancing and extending your amortization to reduce monthly payment amounts.
– Contact your lender directly about options if your mortgage payment becomes unmanageable and discuss possibly extending your amortization on insured and conventional mortgages.