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 by 45%.
Of course many of you have reached out and asked about this, and therefore 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, lets say that rates double – to 4%, your payments go up 25%. If rates triple, to 6% then yes, 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, these stories, one thing that they almost never 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 be rising 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 it that your average household income will increase by 3% per year? Because 3% increase to your income equals 45% increase in mortgage payment, which covers a tripling of your interest rate at renewal.
Let’s get one thing clear, 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 is going to 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, is your mortgage going to be 500 thousand dollars, no it is not, it is likely going to be closer to 425,000. A 75,000 dollar reduction in your principal balance of your mortgage, 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 the where the value of the property will be in the next 4 years, and it especially will not seem like it now, but over the last 60 years, we have seen an increase to 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 payments one change. If you are in 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 all of these increases – your rate is currently sitting at around 2.5-2.7%. You qualified for a payment equivalent to 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 really cause for all this stress and panic.
Of course, you aren’t worried about these rate rises so much, but what you are worried about is how high will the rates go.
The truth of the matter is, that you CAN pay more, even though you don’t want to pay 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 are able to, 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. If you would like to discuss a specific situation, let’s book a call.