Interest rates are expected to rise up to six times over the next few years in Canada, which can have a significant impact on the economy. While we have all been enjoying the current low interest rates designed to stimulate the economy during Covid, the increases are expected as early as next year (2022) and here’s what you need to know to be informed and plan ahead:
How mortgage interest rates work: Bank interest rates vs. Bank of Canada prime rate
Let’s start at the beginning, the national prime interest rate is the foundational interest rate used as a benchmark for all other lenders to establish their own interest rates. The national prime interest rate is determined by The Bank of Canada (BOC), and as of November 2021, the rate is at 2.45%.
The BOC reviews the interest rate eight times a year to determine if a change is required and for the last few years there have been no changes.
The fixed rates we lock into at our lenders are usually fairly close to the BOC rate, however the variable rates are calculated as a deduction from the BOC prime rate. As the BOC changes the national prime rate, the banks pass on the changes to the consumer, however it is at your lender's discretion to reduce your variable rate as it suits their own business. As an example, if BOC lowers their rate by 0.25%, your lender may only choose to reduce your variable rate by 0.15%
Patterns in history: Expected interest rate increases
Historically, fixed rates are usually higher than variable rates when applying for a mortgage and as a customer, you can lock into a three or five year term. Fixed rates can be more expensive than variable rates over the term of the mortgage, however this is the cost you pay for consistency of payments and peace of mind. When we look a bit further at the BOC rate changes over time, they tend to fluctuate in increments of 0.25% The current speculation is that there may be up to six increases in interest rates over the next few years, beginning in 2022. This is expected to bring a significant rise to the lowered rate we have been taking advantage of during Covid and such, monthly mortgage payments can materially increase.
Impacts to mortgages: Fixed, variable and cash flow
The expected BOC interest rate increases are alarming for all, however if you are in a fixed mortgage, you can be sheltered from the immediate increases and be subject to a higher fixed rate at the end of your current mortgage term.
On the contrary, variable mortgage rates will increase and the impact to monthly mortgage payments can increase alongside this change, depending on your lender’s policy. For example, at TD if the rate increases the mortgage payment will not increase however, the total mortgage balance and amortization/payment period will increase. At RBC the payment will increase along with the rate.
For those that will be experiencing an increase in their interest rate, and such, an increase in their mortgage payments, it will be a crucial time to plan ahead and manage your cash flow.
Increased mortgage payments: Ways to manage my payments
If there will be a stress on your current cash flow as a result of the increased mortgage payments, there are a couple of options listed below that can help you manage through these challenging times.
Refinancing your mortgage You may refinance your mortgage to a longer amortization period as soon as possible. For example, if you have 20 years left on your mortgage and you refinance to 30 years, your monthly payment will significantly decline. However, you’ll pay more interest long term and there may be penalties for breaking your current mortgage term.
Home Equity Line of Credit You may leverage a home equity line of credit to withdraw equity in the form of cash against the value of your home. You can then use the cash to pay the increase in mortgage payments. Careful planning is required to ensure you can manage the debt. It would be wise to speak with a financial consultant to understand if this is the best option for your circumstances.
If you’re concerned about the increase, it’s best to get informed and develop a plan of action ahead of time. To avoid getting caught in the backlog with many other Canadians, act ahead of time and get in touch with one of our financial advisors today to determine your options and make an informed decision for your mortgage payments into the future. If you are interested in getting personalized advice, sign up with Fisherman Financial today for a free consultation.