If you own a home and have recently glanced at the headlines, it's likely that you've considered what an increase in interest rates may entail for your mortgage.
The number of headlines about rising interest rates and increasing inflation is increasing. The Bank of Canada raised benchmark rates as inflation reached historical highs to help prevent high inflation from becoming entrenched. The benchmark rate set by the Bank of Canada also serves as a baseline for the interest rates that financial institutions charge their clients.
Understanding the possible effects of rising interest rates on mortgages and other loans, as well as the related payments, is crucial for homeowners.
Many Canadians are uncertain about how shifting rates can effect them, with one-third of those polled stating they are unaware of how rising interest rates might influence their ability to renew their mortgage.
Here's some advice on what homeowners should know about rising interest rates and their impact on mortgage rates, as well as what the future may hold for homeowners, in order to help with some important questions relating to rising interest rates.
Review the mortgage's terms.
Take an inventory of your existing position, as the first thing you should do.
"Do you have a mortgage with a fixed rate? or a mortgage with a variable rate? What date will you be renewing? Which interest rate do you now have? When it comes time to renew your mortgage, how much will you still owe? Each of these issues must be addressed in order for you to comprehend your current circumstance and begin evaluating if it still suits your interests.
If you've recently taken out a mortgage, your interest rate when it comes time to renew could be significantly higher. This implies that your mortgage payments may increase if you want to maintain your original mortgage amortization plan.
As a result, you might want to consider your options to see if your current mortgage position can still support your unique financial objectives. Check out this article about the distinctions between fixed and variable rate mortgages to find out more information.
The interest rate may change when there is a variable interest rate. If the Mortgage Prime Rate decreases, more of your payment will go toward the principal. Your principal and interest payments will remain the same for the duration of the loan. More money will go toward interest if the Mortgage Prime Rate increases.
Your interest rate will change in response to changes in the Prime Rate if you currently have a variable rate term portion.
Your outstanding debt at renewal may be higher than expected if you don't make any adjustments to your payments and more of your payments have gone toward interest than principal. This implies that in order to reinstate your original agreed-upon repayment schedule, your payments may be increased at renewal (i.e., your amortization period). For some clients, extending to a longer amortization period might be a viable option, but they would need credit approval as part of the refinance. Your payment amount may change if you decide to alter your payment schedule at any time.
As interest rates are on the rise, raising the size or frequency of your regular payments is one way to help manage them.
"You may also pay in one lump sum, subject to certain restrictions. You'll need to consider which works best for your lifestyle and how comfortable you are with your interest rate fluctuating during the term of your mortgage when it comes time to renew whether you want a fixed or variable rate mortgage.
If interest rates rise during the period of the loan, a fixed rate interest rate protects you from unexpected and potentially large increases in monthly mortgage payments.
Keep an eye on what's occurring in the market, if you currently have fixed-rate mortgages.
"While you might not immediately notice the effects of rate increases, you will probably be renewing in a different rate environment than when your term first started. It is therefore crucial to understand how rate changes will affect your future budgeting and to make appropriate plans.
To pay off your mortgage more quickly and make your payments more bearable at renewal when interest rates may be higher, you may also think about making lump sum payments throughout the course of your term or raising your payment, just like customers of variable rate products.
It's crucial to be aware of all of your options when your financial requirements develop over time, fluctuate, and the interest rate environment changes. Find out if there are flexible payment choices that can help you be ready for the unexpected, such as the ability to pay off your mortgage more quickly, accelerate or defer payments, or even make a one-time payment without incurring prepayment penalties.
To learn about the kinds of Flexible Mortgage Payment reputable lenders like TD offer, click here.