What will a rate increase mean for you?


With the recent interest rate increase mainstream media has published doom and gloom scenarios about what will happen to the average Canadian home owner.  In a recent article in the Globe and Mail the headline read: "Sink or swim: How will you cope with higher mortgage payments?"

We all know that bad news sells.  For most people looking at their personal finances a large jump in mortgage interest rates does have the potential to be just that, bad news.

For the past several years we have enjoyed an environment of low interest rates and relatively easy money.  Credit has flowed at historically high rates as Canadians accumulated debt to support a lifestyle of consumerism.  The same lifestyle that has driven our economy and helped to keep our heads above water during the world wide financial crises.

It may be that the time has come for most of us to tighten our belts and start focusing on paying down debt and increasing our savings.  A big part of that strategy is going to include looking at the mortgage we have and determining what our options are to better manage household finances.  In doing that it is important to also have a clear understanding of what a rate increase will mean.

For most people who are in a mortgage product where the rate is locked in for a set period of time a rate increase today will not impact your current situation.  Come renewal time however it is something that needs to be considered so having a plan in place today is the best thing you can do to protect yourself.

Here are some things to consider when looking at rate increases:

Let's say that you have a mortgage amount of $300,000.00 and your current rate of interest is 3.39%, your monthly payment when amortized over 25 years is $1480.45 (not including property tax, etc.)

If rates increased by a full 1% to 4.39% your mortgage payment would be $1642.14, an increase of $161.69 per month.  If rates increased to 5.39% your monthly payment would be $1812.01 or $331.56 more per month.  For most people increases are still manageable.

There is one thing however that the media does not consider when looking at how a mortgage will be impacted with rate increases.  Simply that if you make all of your payment on time, you will not owe as much as you did at the start.  Let's illustrate what that means to the average consumer who has a $300,000 mortgage.

A mortgage of $300,000.00 amortized over 25 years, on a five year term, at 3.39% will have a balance of approximately $258,316.00 at maturity.  If you renew your mortgage leaving your amortization at 20 years your payment at 4.39% per annum is $1613.45, and at 5.39% is $1752.28 - still an increase but not as dramatic as what some people may think.

You also have the option of extending your amortization again to 25 years, that means that at 4.39% your monthly payment is $1413.96 which is actually lower than your original payment of $1480.45!  If you were to renew at 5.39% and extend your amortization to 25 years your monthly payment is only $1560.24 or an increase of $79.79 per month.  Not nearly the doom and gloom scenario that some would have you believe.

We all certainly want to have our mortgage paid off sooner rather than later, but our point here is that Canadians have multiple options to consider if rates do increase.  Talking to a licensed mortgage professional is your best option to understanding what a rate increase will mean to you and to build a strategy to help you cope with any increases in interest rates.

At CENTUM we believe that working with our clients and helping them to structure a sound home ownership financing plan is the most important thing we do for our clients.  We are always Looking out for your best interest®.