Preparing for Mortgage Rate Hikes

 

 

Pandemonium, panic and uncertainty were the initial reactions to the recent hike in Mortgage Rates. The Bank of Canada’s decision outlines the posted five-year fixed mortgage rates at Canada’s biggest banks to calculate the rate used in stress tests to determine whether borrowers can qualify for both uninsured and insured mortgages.  In truth, it is a policy to protect the interest of both parties. The central bank’s conventional mortgage five-year rate, which is updated weekly, was 5.34 % as of May 2nd.  The big problem here is that many Canadians are currently living in homes they won’t be able to afford since these interest rates have started to rise.

When did this move transpire?

Since Jan 1st, buyers who don’t need mortgage insurance were required to prove they can handle payments at a qualifying rate of the greater of the central bank’s five-year benchmark rate or two percentage points higher than the contractual mortgage rate.

Home-buyers with less than a 20 per cent down payment seeking an insured mortgage must qualify at the central bank’s benchmark five-year mortgage rate.

How are Home-buyers affected?

According to Steve Huebl from Canadian Mortgage Trends, he says in his article that despite the rising concern, the hikes are unlikely to affect the majority of NEW homebuyers , at least as far as their contract rate is concerned (i.e., the rate they are actually paying for their mortgage). That’s because while the banks have raised their posted rates, their “special” and discretionary rates—that is, the rates available to most well-qualified borrowers—remain largely unchanged or just modestly higher.

The other thing to consider is that because of the higher rates, banks will now compete to recieve the same piece of the pie. So in truth, the customer holds the trump card because banks will now try and customize their service to match the needs of the client.

Another positive from this economic adjustment is that savers will be in luck with the higher interest rates.  Flora Pan from CBC writes in her article that according to Susan Daley (a financial advisor), she says  “for individuals who are saving, increasing interest rates means that when they’re putting their money into a GIC, or savings account or even bonds in the market, it means they’re going to get a higher rate for their money and be able to save more down the road”.

Below are some tips according to MoneyWise to help you prepare better for the current state of the real estate market.

How should we handle this?

Tip #1: Pay Down Your Principal

If rates are going up, the best plan is to lower your principle so you’ll pay interest on a smaller amount of debt in the future. 

Switching from Monthly to Rapid Bi-Weekly

You can save thousands of dollars by making a few small changes that will help to pay down your principal faster, such as switching from monthly mortgage payments to bi-weekly rapid payments.

For example, on a $250,000 mortgage at 3.99% interest amortized over 25 years, you could save over $20,000 by switching to bi-weekly rapid payments!

Lump Sum Prepayments

Also consider making lump sum prepayments or double up one month. Many closed mortgages allow you to pay up to 15-20 per cent of your mortgage or to double up a monthly payment annually. Prepayments are applied directly to the principal balance, which will save you money.

Tip #2: Plan for it Now

Pure and simple – if you’re worried about money problems in the future, deal with it now. Create a savings account that will be used to cover increases in mortgage payments in the future. If you’re currently on a variable mortgage rate, you’re probably paying very low interest. Imagine your interest rate was 2% higher, calculate what your payments would be and then put the extra aside in a savings account.

Tip #3: Get Some Professional Advice

If you’re worried about not being able to afford your home when rates increase, speak with a mortgage professional about your options. We here at NOC connect you to the right financial advisors in your region to help you finance/refinance now and lock in at a lower rate. Or, it might make sense for you to consolidate your debt to pay off high interest loans with a home equity loan and these advisory services is what makes us great at what we do.

Tip #4: Get Real About Your Debt

If you’re already living above your means, it will only get worse. Be honest about your current debt level. If you have to, downsize your home or consolidate your loans to protect yourself from rising interest rates. Don’t let your debt become unaffordable before it’s too late. Most importantly, if you are shopping for a new home, calculate your affordability at a much higher interest rate, it’s the only way you can determine your chances of affording your home for the long term.

Tip #5: Get out of your Comfort Zone

Move to and explore different cities to help you gauge your investment and help create a better future for your kids. Windsor is a great region to invest in Ontario at this moment in time, with the annual home value appreciating at an unprecedented rate. You can get a 1900 sq ft detached 4 bedroom home in Central Windsor in the low 500,000 range – this range is what people would pay for a condo in Toronto. 

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