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Survive an Era of Record-High Interest Rates in Canada

IK Financial - Mortgage Articles
The recent announcement by the Bank of Canada on July 12, 2023, brought us another interest hike of 0.25%, which leads us to the rate of 5%, marking the highest rate in the past 22 years. This situation has raised concerns and added uncertainty for both existing borrowers and prospective first-time buyers. However, by implementing certain strategies, it is possible to navigate through these challenging times with greater confidence. In our latest article, we wanted to cover some essential points to consider for different types of mortgage holders:

Fixed Rate Holders

A fixed-rate mortgage is a type of home loan where the interest rate remains constant for the entire mortgage term. This offers borrowers stability and predictability, as their monthly payments remain the same, unaffected by fluctuations in interest rates. With record-high interest rates, having a fixed rate provides protection and peace of mind, ensuring consistent mortgage payments over time. However, it's important to review options before the term ends to secure favourable terms for renewal.

Benefits and tips for those with fixed-rate mortgage:
  • If you already have a fixed-rate mortgage, you are shielded from immediate rate hikes. However, when the time comes for renewal, rates may be significantly higher or lower (depending on your term).
  • Prepare your budget for increased monthly mortgage payments. Calculate the difference between your current payment and the expected higher payment to ensure you can comfortably afford it. Adjust your spending and saving habits accordingly.
  • Consider increasing your monthly payment or at least putting the funds aside to proactively manage higher interest costs. This can help you pay down your principal faster and reduce the overall impact of rising rates.

Capped Variable Rate Holders

A variable-rate mortgage is a type of home loan where the interest rate fluctuates based on changes in the broader interest rate market. This means that borrowers with variable-rate mortgages may experience changes in their monthly mortgage payments due to fluctuations in interest rates. While variable rates can initially be lower than fixed rates, they come with the risk of potential rate increases in the future.

Benefits and tips for those with capped variable rate mortgage:
  • Stay informed about changes in interest rates and keep a close eye on the Bank of Canada's announcements. Being aware of rate movements can help you anticipate potential increases and plan accordingly.
  • If you are uncomfortable with the uncertainty of variable rates, explore the possibility of switching to a fixed-rate mortgage. While it may result in higher rates initially, it provides stability and protects against future rate hikes.
  • If your budget allows, consider increasing your monthly payment to proactively manage higher interest costs. This can help you pay down your principal faster and reduce the overall impact of rising rates.

Variable rate mortgage with fixed payments

Variable rate mortgage with fixed payments is a type of home loan where the monthly mortgage payment remains constant throughout the term of the mortgage, regardless of changes in the interest rate. In this mortgage structure, the interest rate fluctuates based on changes in the broader interest rate market, usually tied to a specific index such as the prime rate or the Bank of Canada's overnight lending rate. However, the borrower's monthly payment amount remains unchanged, providing stability and predictability in budgeting.

Benefits and tips for those with variable rate mortgage with fixed payments:
  • Understand the trigger rate by familiarizing yourself with the trigger rate. It can be caused by changes in the interest rate market. Knowing the trigger rate will help you anticipate and plan for potential changes in your monthly payment.
  • Regularly evaluate your ability to handle potential increases in your mortgage payment, considering factors such as income, expenses, and upcoming financial obligations. Make sure to increase the payment after every BoC rate announcement to prevent reaching the trigger rate.
  • Consider refinancing or switching to a fixed-rate mortgage if you are concerned about payment. Explore refinancing options to switch to a fixed-rate mortgage for stability and peace of mind.

Navigating record-high interest rates requires careful planning and consideration. Assess your mortgage type, understand its benefits and risks, and take proactive measures to manage potential increases in monthly payments. Reviewing your options and adjusting your budget accordingly can help you navigate this challenging era with confidence. Visit ikfinancial.com to book your complimentary call with one of our licensed mortgage agents.
IK Financial Mortgage Team operates on behalf of Mortgage Edge. Lic#10680

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