Rates continue to be the hot topic – and another headline seems to have caused a lot of stir – The Bank of Canada is saying that your mortgage payment could jump up 45%.
Of course, many of you have reached out and asked about this, so I have decided to write this post: “Will my payment jump 45%?” is the question.
When you do the math, you will find that a 45% increase in your payment happens if your interest rate triples. So, the question, in other words, is, at renewal, will my interest rate triple? If rates triple, then payments increase by 45%. Pretty basic – so let’s go deeper. And let’s start with a 2% starting interest rate – the bank of Canada is cautioning you.
So at renewal, let’s say that rates double – to 4%, and your payments go up 25%. If rates triple to 6%, your payment goes up 45%. So this is real; it can happen; in fact, for many people renewing in the next few months, it has happened to them.
These headlines and stories, one thing they rarely cover, is an equally real fact. And when we break things down into actual hard numbers, payments, and dollars, I believe this puts things into better perspective.
So if we are looking at rates rising and payments going up by a percentage, we should also be looking at and asking – will your household income rise annually by about 1.5% per year? Can you expect this realistically?
A 1.5% raise will cover a 25% increase in mortgage payment which is a 100% increase in rates.
How realistic is your average household income to increase by 3% per year? Because a 3% increase to your income equals a 45% increase in mortgage payment, which covers a tripling of your interest rate at renewal.
Let’s clarify: am I saying that a 980 dollar per month increase to your mortgage payment on a 500,000 dollar mortgage is not a big deal?
I’m not saying that – at all.
What I am doing is breaking it down into numbers, so you know where you are and that you have an action plan.
If you have a 2% rate and you are worried that at renewal, your rate will go up to 6%, well, to offset that, you need to find a way to increase your income by about 3% per year.
Here is a KEY POINT – at renewal, will your mortgage be 500 thousand dollars? No, it is not; it will likely be closer to 425,000. A 75,000-dollar reduction in your mortgage’s principal balance and a 75,000-dollar increase in your equity and net worth.
There is power in having equity.
Now I’m not going to go into where the value of the property will be in the next four years, and it especially will not seem like it now, but over the last 60 years, we have seen an increase in property values year over year by about 5% per year – on average.
If you are in a variable-rate mortgage, your payment is static, so your prices change. If you are on a fixed-rate mortgage, your payments don’t change. About 1 out of every 10 Canadians are in an Adjustable rate mortgage, and your payment WILL change as the prime rate increases.
Even with these increases, your rate is currently at around 2.5-2.7%. You qualified for a payment of 5.25% when you got this mortgage.
And the next time the bank of Canada meets is July 13, and there is a good chance that the prime rate will increase again. But is all of this cause all this stress and panic?
Of course, you aren’t worried about these rate rises so much, but you are worried about how high the rates will go.
The truth is that you CAN pay more, even though you don’t want to spend more….but you can; otherwise, you would not have qualified because you had to qualify at 5.25%.
So, what’s the conclusion? Well, one thought might be to start budgeting. If you can, increase your payments now; if your rate doesn’t jump, you have paid off more principal, and you are on the path to paying your mortgage off faster, and if your rate does go up, then you are not going to suffer as big of a payment shock.
It’s not always so cut and dry and can be complicated. Let’s book a call if you want to discuss a specific situation.
Here are additional resources you may want to check:
Source:
- Bank of Canada says some Canadians could see mortgage payments jump by 45% in 2025-26 as rates rise.
https://financialpost.com/news/economy/bank-of-canada-financial-system-review-mortgage-payments
