Choosing a mortgage, especially a variable-rate mortgage, requires careful consideration of how interest rate changes could affect your monthly payments and overall affordability. Many borrowers underestimate how even a small rate increase can significantly impact their finances, leaving them unprepared for rising costs.
How Rate Increases Affect Your Mortgage
When interest rates rise, your lender will adjust your monthly payments to cover the higher interest costs. For borrowers with variable-rate mortgages, these changes happen quickly, often in sync with the Bank of Canada’s policy rate adjustments. Even fixed-rate borrowers could face higher costs when renewing their mortgage at the end of their term if rates have risen.
Example: The Cost of Rising Rates
Imagine you have a $400,000 mortgage with a variable rate of 2.5%. If the rate increases by just 1%, your monthly payment could rise by $200–$300. Over the course of a year, that’s an additional $2,400–$3,600—funds that may have been allocated to other expenses or savings.
Strategies to Mitigate the Impact of Rate Increases
- Stress-Test Your Budget: Use a mortgage stress test to calculate how much your payments would be if rates were 1%–2% higher. Ensure you have enough financial cushion to absorb the increase.
- Build an Emergency Fund: Having at least three to six months of living expenses saved can help you manage rising payments without resorting to debt.
- Consider Fixed-Rate Mortgages: If stability is more important to you, a fixed-rate mortgage can provide peace of mind, locking in your payments for the term of the mortgage.
- Make Prepayments: Use prepayment privileges to pay down your principal faster. A lower balance means less impact when rates rise.
- Work With a Mortgage Agent: A knowledgeable agent can help you evaluate your risk tolerance and find a mortgage that aligns with your financial goals.
Why This Matters
Failing to plan for rate increases can put unnecessary stress on your finances. By understanding the potential impact and preparing accordingly, you can enjoy homeownership with greater confidence and stability.
Read the full list of the top 10 mistakes to avoid when getting a mortgage here: Top 10 Mortgage Mistakes
Have Questions? Let’s Talk.
If you’re concerned about rate increases and how they could affect your mortgage, I’m here to help you navigate your options. Call me at 613-318-6315 or schedule a call here: Book a Call.
Let’s make sure your mortgage fits your life—no matter what happens with rates.
-Phil