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How Will Rising Interest Rates Affect My Mortgage?

The Bank of Canada hiked its overnight lending rate by 50 basis points (half a percentage point) in late October. It’s the sixth increase this year, and there might still be another one coming at the Bank’s next announcement in early December.

From a miniscule 0.25 per cent at the end of January, the Bank of Canada rate now stands at 3.75 per cent. The steep rise is intended to control rapid inflation, even at the risk of creating a recession in early 2023 as the economy shrinks and spenders increasingly become savers.

For those who have already spent money on property purchases, especially those who borrowed big to buy, the speedy jump means more changes ahead for mortgage terms and payments. In some instances, the impact could be immediate and possibly problematic, leading to financial challenges and difficult decisions. For instance, homeowners with a variable-rate mortgage will see monthly payments increase even more, straining budgets for some.

If you’re concerned about what rising interest rates mean for your mortgage, here’s a breakdown of what you need to know.

What determines mortgage interest rates?

Several factors go into the interest rate you get when borrowing for a mortgage, or any loan. The amount being borrowed, and the timeframe of the repayment are both factors, as is the borrower’s credit history and financial situation.

The type of mortgage you choose is another factor. In an earlier blog, we explained the difference between fixed-rate mortgages (interest rate doesn’t change for several years) and variable-rate mortgages (where the rate may go up or down based on external factors).

Nothing has a bigger impact on mortgage rates, however, than the Bank of Canada’s overnight lending rate, because this determines what consumer banks and financial institutions pay when lending money to one another. Banks and credit unions use the central bank rate when setting their prime interest rate, which is the basic rate charged to borrowers. When the Bank of Canada rate goes up, so does the prime rate at most institutions.

I’m shopping for a first home. What do rising interest rates mean for me?

It’s never a bad idea to get pre-approved for a mortgage before house-hunting, and now is an ideal time to lock in the best rate you can for as long as your financial institution will guarantee it.

Still, with rates so much higher now than they were 12 months ago, there’s no escaping the higher interest rates you’ll have to pay, which can dramatically increase the long-term cost of borrowing large sums of money, adding tens of thousands in interest fees over the lifespan of a mortgage.

If there’s any consolation for first-time buyers, it’s that rising rates are also cooling off Canada’s red-hot property market, which got even hotter during the pandemic when the cost of borrowing was at rock-bottom. For buyers in some markets, a sales slowdown and declining prices will offset the jump in interest rates. In places where prices are still high, however, even a modest decrease in home prices isn’t much consolation when measured against higher borrowing costs.

I have a variable-rate mortgage. Should I switch to fixed-rate?

If interest rate hikes are making it harder and harder to afford the rising payments on your variable-rate mortgage, you might be better off with the cost certainty of a fixed-rate mortgage instead.

Depending on how much term is left on your current mortgage (usually five years or less), you’ll likely have to pay a penalty to change your borrowing terms. However, if you’re able to lock in at a lower rate, there’s a good chance you’ll be able to make back the cost of that penalty, and maybe even more, in interest savings.

Generally speaking, fixed-rate mortgages come with slightly higher interest rates than variable-rate, because the lender has to compensate for not raising the interest rate even as broader economic conditions change.

I have a fixed-rate mortgage, but it’s up for renewal soon. What can I do?

If you’re paying off a fixed-term mortgage that you secured before rates started soaring, you’ve got some time to adjust and prepare for the higher payments that will come when your term ends and you renew your mortgage. Use the time wisely, stashing extra savings away as much as possible and looking for opportunities to cut costs in other avenues of life. If you’re able, you might even consider speeding up your repayment schedule, or making a mortgage prepayment, to reduce the principal as much as possible before renewal.

No matter what kind of mortgage you’ve got, or how much you owe, it’s always vitally important to understand the impact of rising interest rates on your personal situation. Use this Government of Canada mortgage calculator to determine how rising rates will impact your payments, then adjust your budget to reflect the impact of the new numbers.

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