The much anticipated announcement last week from the Bank of Canada raising its overnight rate has Canadian homeowners and those shopping for a home now wondering what they should be doing as interest rates begin to climb.
“While short-term interest rates are not expected to rise rapidly, they are expected to increase about three percentage points by the end of next year,” said Sal Guatieri, Senior Economist, BMO Capital Markets. “The era of historically low mortgage rates is coming to an end.”
So, what does this mean for home owners and prospective buyers? Is it too late to protect yourself? “The Bank of Canada’s recent rate announcement might leave some homebuyers believing they’re too late to take advantage of historically low mortgage rates,” said Jane Yuen, Senior Manager of Mortgages, BMO Bank of Montreal. “We continue to offer our low-rate 5 year fixed mortgage with maximum 25 year amortization, now at 4.25 per cent. We encourage customers to lock-in now as pressure builds for rates to rise.”
BMO advises Canadian home owners and prospective buyers to stress test their financial budget using a mortgage payment based on a higher interest rate. Here are the top tips to consider to ‘stress test’ your budget today so you don’t become ‘stressed out’ later:
Take a shorter amortization:
– The shorter the life of the mortgage, the less you pay in interest.
– Cutting your amortization period by five years from 30 to 25 years could save you over $53,000 in interest. You will be mortgage-free faster and your monthly payments will only increase by $84.
Make a larger down payment:
– Providing a bigger down payment is an excellent way to help you pay less interest over the life of your mortgage.
Make sure you can afford what you signed up for:
– Stress test your financial budget using a mortgage payment based on a higher interest rate.
– Total housing costs (mortgage payments, property taxes, heating costs, etc.) should not consume more than one-third of household income.
Make pre-payments when you can:
Pay weekly or bi-weekly instead of monthly.
Take advantage of prepayment privileges:
Increase your mortgage payment (principal and interest) by a percentage over the current payment. At BMO this option can be exercised once each calendar year, at any time, without charge.
Pre-pay a percentage of the original mortgage principal each calendar year. At BMO this option can be exercised in minimum amounts of $100 without charge, some conditions apply.
Always make sure you save for a rainy day:
If you are up to your maximum in debt, you may not be well prepared for the leaky roof along the way.
Think carefully about fixed vs. variable:
While variable rates mortgages have been a winning strategy over the long term, fixed rate mortgages (currently at historic lows) come with the peace of mind of being insulated against rate increases.