It’s been a week since the Bank of Canada announced its increase to interest rates, bringing the new base rate to 0.75% from 0.5%. It seems like the news has died down as quickly as it blew up and while the sky hasn’t fallen yet, homeowners and future-homeowners do need to take note.
At its core, this seemingly small increase in an interest rate just increased the monthly payment on a $500,000 variable rate mortgage by $62. If the Bank of Canada were to raise interest rates by a percentage point, your payment would go up by more than $250. Unfortunately, many Canadian families are not prepared for continued increases in interest rates, even as our household debt continues to balloon.
Financial experts are predicting a 75 per cent chance that the BoC will hike rates again this year, so whether you have a variable rate mortgage, will be renewing soon, or want to get on the property ladder, you really need to have a plan in place.
Are you prepared for an increase in your mortgage payments?
Back in May, we shared some data from Manulife Financial that shows that nearly 70% of Canadians wouldn’t be able to make their mortgage payment if rates increased by 10 per cent. While that kind of increase may seem unrealistic right now, you may also want to consider that 14 per cent of those same survey respondents said that they couldn’t handle any increase at all!
That survey painted a pretty bleak picture of Canadian finances and household budgeting. While rates remain historically low, now may be the time to start shifting from accumulating “cheap debt” and to start making a plan for saving.
How can you prepare for an increase in mortgage rates?
The team at Walker Real Estate encourages homeowners to be financially responsible when purchasing a home. Unfortunately, many financial institutions don’t lend you what you can afford; they lend you what they think you can pay back. It’s a business and the more they lend you, the more interest they get paid.
Don’t be lured in by low interest rates or the idea that you can get “more house for the money”. Be honest with yourselves and consider what your long-term job prospects may be. Many people look at their monthly expenses and base their house budget on a monthly mortgage 50 when you renew your mortgage in five years?
Work with a reputable mortgage broker and ask them to base your housing affordability on rates that are 2-3 per cent higher than current rates. While we can’t predict what interest rates will be in five years time, we can prepare ourselves and build in a bit of a cushion.
For bonus points, set aside the difference in your “future” payment and current payment into a savings account. You can use that money to put a bit more money down on your mortgage or for a rainy day or change in your employment situation. This also gets you in the habit of a paying a higher mortgage payment from the beginning, so that when interest rates increase, you aren’t scrambling to adjust your household spending.