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The economy is an ever-changing entity that affects just about everything, including the cost of living, such as mortgage rates. With most lenders you work with, there are two types of mortgage rates available: fixed and variable. When deciding between the two, you might weigh a few different factors to understand better which one will work for your needs.
Fixed-rate mortgages have a set interest rate that will remain the same for the duration of the mortgage term, which can be anywhere from six months up to ten years. Variable-rate mortgages typically have a three or five-year term and their interest rate fluctuates with the Bank of Canada's overnight rate changes.. As inflation increases, variable rate mortgage holders might struggle with their monthly payments. In this post, we’ll discover various ways you can prepare for interest rate changes as a variable-rate mortgage holder.
If you’ve opted for or are considering a variable interest rate mortgage, it is worth noting that these loans are affected by the prime rate. This rate is decided on by your lender, but depends heavily on the Bank of Canada’s set interest rate. If the rate decreases, more of your monthly payment will go toward your principal loan amount, and less toward interest, which can help you pay down your mortgage slightly faster. Some variable rate lenders offer a set payment option on your mortgage where the amount of interest and principal adjusts, and your amortization fluctuates as rates go up or down. This can be beneficial to those who want a variable rate mortgage but would prefer a fixed payment.
Whatever your premium or discount on the prime rate is, it will be available in your loan agreement. Homebuyers who are interested in variable rates are typically drawn to this option because it can be less than a fixed rate and they are comfortable with a bit of rate risk. However, if the economy grows too quickly, these rates can float above fixed ones as the market adjusts to avoid a recession.
Before buying a home, I recommend that all my clients put together a monthly budget. It helps them determine how much money they must pay for necessities and account for what will be left over. Their expenses list should include the cost of home insurance, a fund for potential maintenance, and a gas bill if this is something they didn’t need to consider before. If your mortgage payment increases with inflating interest rates, it might be time to re-examine your budget. This will help you realign fixed expenses and allow you to cut back on anything eating away at your monthly income. If you are struggling to balance your budget, an accountant may be able to help you get on the right track.
Depending on your busy schedule, you could be keen to focus on other financial obligations rather than your variable mortgage rate. However, the state of the economy impacts your variable mortgage rate daily. If you can’t afford a higher mortgage payment, start planning now, and consider refinancing or renewal options, or even switching to a fixed rate depending on what might be available to you. If you don’t, your lender might decide for you, and it could be harder to make your monthly payments.
Markets can be both predictable and unpredictable. The pandemic continues to impact the economy, causing unprecedented times, so it is hard to be certain about the future. It might be time to make an appointment with your lender or a mortgage broker and see what can be done about your rate and the possibility of locking it in. This may come with a penalty, but can provide better protection from fluctuating markets and ensure you can maintain your budget and payments. I can offer my advice on what to do next, and together we can work on a solution that suits your needs.
Just as your variable mortgage rate can increase substantially, the interest rate on your credit balance or other loans could rise. Do what you can to pay down lesser debts within a reasonable time frame, and avoid deferred payment options, which could result in higher payments in the future. Anything that you can’t work on paying down relatively quickly should be reviewed to see if you can negotiate a better rate. If you are diligent about your payments, the bank or lender may be able to offer you a discounted interest rate so that you can focus on getting rid of the debt rather than making minimum payments. Perhaps it could be time to put a freeze on your card to ensure you don’t spend outside of your means.
As with most things, what goes up must come down, including interest rates. Weathering the storm of inflation can be the most challenging part for homeowners, regardless of if they are new to the mortgage landscape or have owned their house for many years. The best protection is to prepare and make choices that will help you down the road. As a mortgage broker, I have extensive experience dealing with various markets and can offer sound advice on options available to you. Contact me today to set up an appointment and get starte
Andrew Thake is a seasoned mortgage broker with over 15 years of industry experience. He’s assisted more than 2,200 clients in finding their ideal mortgage solutions. Recognized for his excellence, Andrew has received high honours and awards, including the National Rookie of the Year from TD Canada Trust and recognition as a Top 10 Ottawa Mortgage Broker in 2023. He has also been inducted into the Hall of Fame at Dominion Lending Centres and has consistently received their Platinum Award during his tenure as a mortgage broker.
Andrew’s dedication lies in serving his clients and prioritizing their needs with an empathetic approach. Throughout the application process, he provides tailored, informed, and efficient services to ensure the best mortgage solutions for his client’s unique circumstances. The best part of Andrew’s job is when he gets to see the joy on his clients’ faces following their mortgage approval.
