Interest Rates Are Moving Up - What Will Your Payments Be At Your Next Renewal
This blog is specifically for those in a fixed rate mortgage. When you take a fixed rate mortgage, you lock in your rate for the term of that mortgage. When your term runs out, we call that your renewal or maturity date, at which point you negotiate the next term. Rates have recently been on the move up from their historic lows. If you have a fixed mortgage, you are very likely going to be renewing into a rate higher than your previous mortgage term.
There has been lots of news about interest rates being on the rise. And while 5-year fixed rates have moved up from their historic lows last year of around 2.5%, they are still very low at just under 3.5% (insured mortgage rates). Even as recently as 2007, the rate on a 5-year term was around 6%. If the trajectory of rates continues, you should understand how your rate will impact the carrying costs on your home.
A $350,000 mortgage amortized over 25 years currently at 2.5% has a monthly payment of $1,568.
While we cannot know what rates will be over the next couple of years, here are monthly payments on the same mortgage at various rates so you can get a sense of what the impact would be on monthly payments if you end up renewing into a higher rate over the coming years:
3% = $1,656
4% = $1,841
5% = $2,035
6% = $2,239
Worried? Here Are Things You Can Do
You cant control the mortgage market, but you can do some things to better prepare and handle your costs in a higher interest rate environment:
Bump payments up now - this will reduce the impact of the higher rates later because it will be on a lower balance and gets you used to paying a bit more.
Eliminate or reduce other debts - if you focus on reducing debt, particularly high-interest debt like credit cards, it will leave you with more cash flow each month to better handle higher mortgage payments.
Refinance to re-amortize - you may have the option of refinancing your mortgage to push out your amortization and therefore lower your payments. This will increase how long you have the mortgage and the overall interest you pay, but it is an option to consider if you are struggling to maintain payments.
Downsize - if it is a possibility for you, you could choose to downsize to a smaller property to reduce your monthly housing costs.
Get in early on renewals and pre-approvals - rates can be held for 4 months so being on top of things to get rate holds can save some big bucks in an increasing rate environment.
Contact me early on if you have a renewal coming up or if you are concerned about handling the increasing payments on your mortgage. We can discuss your options to see if you would benefit from restructuring your mortgage. Have a plan and feel prepared.
Canadian home sales fall in April
Statistics released today by The Canadian Real Estate Association (CREA) show national home sales fell from March to April 2018.
National home sales fell 2.9% from March to April.
Actual (not seasonally adjusted) activity was down 13.9% from April 2017.
The number of newly listed homes declined 4.8% from March to April.
The MLS Home Price Index (HPI) in April was up 1.5% year-over-year (y-o-y).
The national average sale price declined by 11.3% y-o-y in April.
National home sales via Canadian MLS Systems declined by 2.9% in April 2018 to the lowest level in more than five years (Chart A). About 60% of all local housing markets reported fewer sales, led by the Fraser Valley, Calgary, Ottawa and Montreal. Actual (not seasonally adjusted) activity was down 13.9% compared to April of last year and hit a seven-year low for the month. It also stood 6.9% below the 10-year average for the month. Activity was below year-ago levels in about 60% of all local markets, led overwhelmingly by the Lower Mainland of British Columbia and by markets in and around Ontarios Greater Golden Horseshoe (GGH) region.
The stress-test that came into effect this year for homebuyers with more than a twenty percent down payment continued to cast its shadow over sales activity in April, said CREA President Barb Sukkau. Its impact on housing markets varies by region, she added. A professional REALTOR is your best source for information and guidance in negotiations to purchase or sell a home during these changing times, said Sukkau.
This years new stress test has lowered sales activity and destabilized market balance for housing markets in Alberta, Saskatchewan and Newfoundland and Labrador Provinces, said Gregory Klump, CREAs Chief Economist. This is exactly the type of collateral damage that CREA warned the government about. As provinces whose economic prospects have faced difficulties because they are closely tied to those of natural resources, it is puzzling that the government would describe the effect of its new policy as intended consequences.
First quarter: The value of multi-family dwellings leads the rise
Canadian municipalities issued $24.9 billion worth of building permits in the first quarter of 2018, up 3.3% compared with the fourth quarter of 2017.
Construction intentions for residential dwellings led the national increase, rising 6.9% from the fourth quarter of 2017 to $15.9 billion in the first quarter of 2018. The 18.4% increase of the multi-family component more than offset a 3.5% decline in the single-family component.
On the other hand, the value of non-residential building permits fell 2.6% from the fourth quarter of 2017 to $9.0 billion in the first quarter of 2018. The drop was the result of lower activity in both the industrial and institutional components.