Preparing for Mortgage Rate Increases

If you’ve been scanning the property listings lately in order to buy a house or need to renew your mortgage soon, chances are you’ve heard that mortgage rates skyrocketed last month with the popular 5 year fixed rate going up by 1%. Include this with escalating property prices and stories of house hunters bidding over the asking price in order to secure a house purchase and it results in a pretty scary situation for current and future Canadian homeowners.

The media have created a picture of doom and gloom about the outlook for the housing market and a higher interest rate environment but there are steps you can take as mortgage rates increase to help you prepare for it.

When a recession hits, like in 2009, consumers spend less and governments react by decreasing interest rates to encourage borrowing. As the economy starts to grow the pendulum swings and up goes the cost of borrowing.

As it turns out, the Canadian economy is resilient, so our pendulum is swinging over to the other side faster than other countries (including our big brother down south). Inflation is up and consumer confidence is in check. As a result, factors that directly affect mortgage rates will increase, such as bond yields and the Bank of Canada’s key overnight lending rate. There’s no doubt about it, borrowing to buy a house is going to get more expensive.

When industry experts talk about mortgage rates, they all agree on one thing – gone are the days of record low rates.

So what does this mean for the average Canadian homeowner?

The answer depends on the type of mortgage rate you have. If you’re locked into a fixed mortgage rate and have a few years left on your term, then rate increases probably aren’t on your radar. You pay the same amount for your mortgage every month and don’t give it much thought. But, when your fixed rate term is up and you’re due to renew your mortgage, rates will be higher, meaning your payments could go up.

If you have a variable rate mortgage your monthly payments will fluctuate with interest rate changes. So any increase in interest rates means you pay more.

This all sounds pretty grim, but there are a few things you can do now to ease the effects of increasing mortgage rates.

1. Do your homework

Prepare yourself; dig out your mortgage documents. Find out what type of mortgage you currently have and be aware of the terms and conditions. Specifically, find out what rate you’re paying now, the term of the mortgage (i.e. the length of the contract if you have a fixed mortgage rate), and the amount left on the mortgage.

2. Compare the market to find the best rate

If you’re refinancing or looking for a new mortgage don’t just go with the first rate you’re offered. Ask for a better offer and make sure you compare the market. You can use a service like RateSupermarket.ca to compare mortgage rates offered by banks, brokers, specialty lenders and credit unions. A service like this will help you determine the benchmark for a competitive mortgage rate and also put you in touch with the broker or lender offering that rate.

3. Try to get a better rate now

If your mortgage is up for renewal in the next few months, speak to a professional about getting a new rate now. Some lenders will allow you to renew early by blending your existing mortgage with a new mortgage of a longer term. This might cost you a small administration fee, but it could be worth it in the long run.

4. Lock in a low rate

If you’re on a variable rate mortgage and you’re concerned about rate increases, you might want to consider locking in at a fixed rate. You’ll pay a premium for the security of static monthly payments, but it might be worth the peace of mind. This decision is based on your personal risk profile.

If you’re a new home buyer, but haven’t yet found your dream home, get pre-approved so you can lock in a rate. Most pre-approvals will hold your rate for up to 120 days at no charge. This will give you some breathing room as you hit the open houses.

5. Get some professional advice

Everyone’s situation is different. Very few people understand the pros and cons of all the different mortgage options. A mortgage professional can help you to determine if it’s worth refinancing at current rates given the penalty you may be charged. They can help clarify the fixed versus variable debate and explain the various repayment options.

It’s always best to get advice on your personal situation.

6. Pay it down

To alleviate the effects of increased mortgage rates, decrease the amount of money you’re borrowing. This may seem unrealistic, but even small changes will help you pay down your mortgage faster.

Consider changing to a bi-weekly rapid payment schedule, make a lump sum payment or double up on your payments one month. Any of these options will help you save on interest and leave you mortgage free years sooner.

It’s not all doom and gloom. Rates are going up, but there are still steps that you can take to help ease the effects.

Kelvin Mangaroo is the Founder of RateSupermarket.ca, Canada’s mortgage rates comparison website, that enables you to compare the best mortgage rates across the country from the top banks, credit unions and brokers.
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