How Rising Interest Rates Affect Your Mortgage Payments
When interest rates are raised by the Bank of Canada, this often affects mortgage payments. This is because the banks and lending institutions have to now pay more to borrow money.
Keep in mind that mortgage payments will not automatically increase because the national interest rate went up. Under certain circumstances, they can actually decrease. It is also important to note that anyone with an established fixed mortgage rate will not see a change.
One of the promising aspects of an increasing rate is that lenders become more competitive. This is because fewer people finance after a rise in the rates. When this happens the lenders become extremely aggressive to ensure their loan volume does not drop.
New products are generally introduced to ensure mortgage payments remain as low as possible. A good example of this is the forty year mortgage in the United States. This long-term mortgage will keep payments low by spreading them out for another ten years in comparison to the more traditional thirty-year mortgage. This longer term will require additional interest during the lifetime of the loan.
In Canada, the typical mortgage amortization period is 25 years but this hasn't stopped lenders from getting creative, just as they have south of the border.
As the home increases in value and a mortgage is paid down, the equity in the home will increase. There are also interest-only products. This keeps the payment lower because the monthly payments are only for the interest. The principle is not being paid unless the homeowner chooses to increase the amount of their monthly payments. This type of loan does require discipline in order to eventually pay off the principle of the home.
When the rates are raised by the Bank of Canada, adjustable rate mortgages become more common. The lenders reduce their profit margins, loan volume, and yield to provide potential clients with a lower mortgage while ensuring their loan volume does not plummet. This type of rate is often much lower than that of a traditional mortgage.
When compared to the much higher fixed rate mortgage, these rates are more attractive because they are substantially lower. This is especially true if the borrowers do not plan on remaining in the home for the duration of the mortgage. The homeowner does take a risk that the rate may increase as time passes causing the monthly mortgage payment to increase.
Speak with a Professional
It is important to speak with a qualified mortgage professional when considering purchasing a home. They can explain the options available according to your specific situation. An interest rate change is not necessarily a good or bad reason for purchasing a home.
Owning a home is about a lot more than just the transactions, interest rates and numbers. It is about reaching financial goals and establishing a secure home for the individual or family. Receiving expert advice from a mortgage professional is always highly recommended.
For more information, call Spectrum Realty today at (416) 736-6500 or contact us here.