Understanding interest rate change is key when the Bank of Canada is rapidly raising interest rates in an effort to reduce inflation and cool the demand for goods and services. For homeowners with a static variable rate mortgage (where the payment remains the same), we understand there is uncertainty about this rate environment. The following will help you to understand the effect of rising interest rates on your mortgage and the options available.
Understanding Interest Rate Changes – Static Variable Rate Mortgages
If you hold a Static Variable Rate Mortgage, part of your regular mortgage payment is applied to your mortgage principal and the other part is applied to accrued interest on the principal. The payment is designed to remain the same throughout the term.
What happens when rates change:
- When rates increase, your scheduled payment does not increase – rather, more of your payment is allocated to the accrued interest, and less to the principal.
- As rates decrease, more of your payment is allocated towards paying down the principal of your mortgage.
- When less of your payment is applied to your principal, your amortization will increase, which will mean it will take longer to pay off your mortgage.
- When it’s time to renew your mortgage, your amortization schedule will be brought back to its original timeline. In the case a rising prime rate will result in less of your payment being applied to your principal balance. Therefore, your mortgage payment may increase at the time of renewal, possibly by a large amount.
Increase your mortgage principal payment
You can increase your mortgage principal payment, and reduce the amortization. There are three ways to increase your payment:
- Increase your scheduled payment by the allowable amount
- Make Double-Up mortgage payments if allowed by your lender
- Prepay the allowable percentage of your original principal mortgage amount each year
Switch to a fixed rate mortgage
You may also switch from a variable rate mortgage to a fixed rate mortgage with your current lender. You then must choose a fixed term that is equal or greater than your remaining term without penalty at current rates. This option will appeal to homeowners who feel more comfortable with a fixed rate that is locked in. As a result, this would then protect against any future rate changes within your term.
To learn more about this option, book an appointment online or call us.