ADAM MILLS REALTY

Will I Be Able to Afford My Mortgage If Rates Rise?

Many homeowners who capitalized on the all-time low mortgage rates over the last couple of years are worried that when it’s time to renew, they won’t be able to afford their monthly payments. In fact, 1 in 4 homeowners said they’d have to sell their homes if interest rates rise more.

The low-interest rates that occurred between 2020 to now fuelled a surge in buyers that ultimately made the price of homes skyrocket. Many people were approved for mortgage amounts that they wouldn’t have, had interest rates remained where they were prior to 2020.

Now that interest rates are back on the rise, it’s scary to think that when it comes time to renew, you might not be able to afford your home.

If you locked your mortgage on a fixed rate when rates were low, you likely have at least 3-5 years before renewing. The best way to prepare for rate hikes is to pay off as much principal as possible while you have that low-interest rate. Making additional payments can help you pay off the principal quicker. However, there is usually a maximum to how many additional payments you can make.

If you can pay off more principal when it comes time to renew, the lowered principal amount should help offset the difference in monthly payments caused by increased interest rates.

If you’re currently on a variable-rate mortgage and are stressed watching interest rates increase, you can switch to a fixed-rate mortgage. 

When you’re on a variable rate mortgage, the principal you pay each month differs as the rates change. This means that at the end of your term, you may have a higher amount of principal remaining than you would with a fixed-rate mortgage; however, your monthly payments will likely be lower.

If you’re looking for a sense of security as the interest rates fluctuate, switching to a fixed rate may be a good option for you. In most cases, you’ll be able to lock in at a rate with no penalties or additional fees.

Ultimately, the choice between fixed or variable comes down to risk. If you’re in a financial position where you can tolerate risk, variable may be the right choice for you. Alternatively, fixed could be the best option if you’re looking for peace of mind and stability and can afford slightly higher monthly payments.

Other ways to prepare for renewal & rising interest rates include:

  • Try to cut down expenses to put more money down toward your mortgage
  • Pay down your debts with the highest interest rates first to pay less toward interest (high-interest debts include credit cards, personal loans or lines of credit, etc.)
  • If you’re currently in the market for a home, don’t stretch your budget to its maximum
  • Build an emergency fund to deal with unexpected expenses

Rising interest rates can seem very scary, but if you prepare and manage your finances accordingly when it comes time to renew, you will most likely not have to sell your home.

See this chart, which was included in a Consumer Alert shared by the Government of Canada, outlining the impact of increased interest rates on your monthly payments.

If you’re currently paying $1411 per month with your current rate and rates increase by 3%, you’ll see a monthly increase of just under $460. It’s predicted that rates will reach 4.5% by 2026, which will be a less than 3% increase for most.

While it is completely normal to feel stressed or worried about rising interest rates, you may be worrying for no reason at all. If you’re feeling overwhelmed by your financial situation and future, consult a professional. Getting sound financial advice could certainly help ease your mind.