The mortgage interest rate hikes we’ve seen over the past month don’t look to be reversing any time soon; bond yields continue to trend high, and lenders are adjusting their fixed offerings accordingly. The future is looking less certain for homeowners nearing renewal, or first time buyers reassessing their ownership budgets.
Could you still afford your monthly mortgage payments if rates rose by one per cent? Two? Five? It’s vital to know the limits of your mortgage affordability – and how to react should you reach them. Stress testing your mortgage identifies areas of financial weakness, and a glimpse at possible new budgeting requirements. Here are a few ways to put yours to the test.
Ask “What If?” With Your Rate
Perhaps you’re a savvy homeowner who snapped up one of the record low mortgage rates seen last year – at their lowest, we saw lenders dip their five-year fixed rates as far as 2.62 per cent in April! If you’ve locked in at such a bargain, you certainly deserve a pat on the back… but don’t get too used to it. Whether you’re in a four, five or 10-year agreement, be ready for a new rate reality when it comes time to renew. Use a mortgage calculator to determine what your monthly payments could be, and make a plan to adapt. Are there areas of your monthly budget that could be reallocated to your home payments? Do you have an emergency savings fund in case you need to supplement your payments? Should you start one?
Consider the recent changes we’ve seen to the best five-year fixed options in recent months; let’s say you took advantage of the record low 2.62, and locked in at that rate,with a total mortgage value of $363,750 (The average resale price in Canada according to CMHC), and a 25-year amortization. At 2.62, your payment each month would total $1,720. Now, let’s say you qualified today for the much higher market norm of 5.14: you’d be paying $2,145 each month instead. That’s a difference of $425!
Attack Your Amortization
While we can’t predict if rates will be higher or lower in the years to come, there is one certainty – you will pay less interest if you pay your mortgage down faster. If you have a spare nest egg, consider making a lump sum, which goes directly to reducing your principal debt. If access to a chunk of change is out of the equation right now, switching to an accelerated payment schedule can whittle down your mortgage faster and at your current rate. Bi-weekly rapid payments are made every two weeks, resulting in an extra payment made each year, which goes directly toward your mortgage principal. You’ll have less debt to finance come renewal time, and a higher rate may not be so daunting.
Should You Switch To Variable?
Variable rates, which correspond directly to interest rates set by the Bank of Canada, may move higher or lower throughout the course of a mortgage. While traditionally priced lower than fixed options, the increasingly narrow spread between them and record low fixed options this spring had consumers locking in in droves.
With the spread between fixed and variable options widening once again, consumers may be tempted by what are still very competitive variable rates. National interest rates haven’t budged from one per cent since September 2010, and while slow but steady economic gains have some experts thinking policy makers may be prompted to raise rates, movement is still not expected until 2014 – and even then, monetary policy will take a “gradual normalization” stance, according to Governor Stephen Poloz. It can be argued that the current economic climate provides a semblance of stability for those who choose the variable route.
Is It Still A Good Idea To Lock In?
While fixed mortgage rates may not be as low as they were this spring, they’re still a bargain compared to the high teen interest rates experienced in the 80’s, and even compared to five years ago, with the best five-year fixed sitting at 4.99 per cent in 2008. The best mortgage rate for you will be one that’s affordable with your budget, and provides the features and payment flexibility you may require as the economic climate continues to change.
Week In Review
It’s been a quiet week for mortgage rates – no changes seen for one, five or 10-year fixed options, or for five-year variable options. Looks like rates are holding steady, if not at high levels, as bond yields remain steep.