It’s been a good, long run: loan interest rates have been at record lows for … well, it seems like forever. But those days appear to be numbered. As the world economy recovers, interest rates are predicted to climb and some forecasts call for steady increases through the next few years.
As interest rates increase, the cost of mortgaging a home will also rise – and probably as a response to the anticipated rise in mortgage rates, the federal government has introduced more stringent mortgage standards to protect consumers from taking on too much debt.
When interest rates go up, consumer spending goes down, the economy slows, home buying activity diminishes and housing prices tend to remain constant.
For those arranging a new mortgage or needing to refinance an existing mortgage, payments will increase. Here’s an example of the impact of interest rate increases on monthly mortgage payments and total costs:
Costs for a $100,000 mortgage with a 25-year amortization
A recent survey* by the Canadian Association of Accredited Mortgage Professionals (CAAMP) found that the vast majority of Canadians are not taking undue mortgage risks and have factored rising interest rates into their mortgage decision. CAAMP also says that, for most Canadians, income gains should offset much or all of the increases in mortgage payments.
If you want to make the most of lower rates while they are still here, review your mortgage details with a mortgage professional. If you are mortgaged to the max, or have a variable rate mortgage that you might not be able to afford if interest rates increase, consider locking in at today’s rates. If you are near the end of your mortgage term, shop around for the mortgage that has the best rates and features to meet your needs.
Depending on how your mortgage was initially set up, if you get stuck with a higher rate and are feeling the pinch, you can ask your lender to change the payment structure or amortization period to help make monthly payments more manageable – but your overall interest costs will surely increase, perhaps substantially.
From any perspective, rising interest rates are bound to have an effect on your finances and investments. Your professional advisor can help you make the best mortgage and other decisions for your personal situation and your overall financial goals.
*CAAMP – Revisiting the Canadian Mortgage Market, January 2010, page 5.
This column, written and published by Investors Group Financial Services Inc., presents general information only and is not a solicitation to buy or sell any investments. Contact a financial advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant. Chris Cochrane – Consultant 613-933-7777.