How will rising interest rates affect me?

Since the Bank of Canada raised its key interest rate by 0.25% in early March, a lot of people have had questions. Homeowners wonder how it will affect their mortgage payments, and potential buyers – especially first-timers – are asking if it will be another roadblock to affordability. I talked to a few of my mortgage advisors to see what they had to say. 

First off, let’s put that quarter of a percentage into perspective. According to James Harrison, Mortgage Broker with Mortgages.ca, the increase works out to about $12 a month per $100K you owe. So if you’ve got a $500K mortgage, your monthly payment will go up by about $60. With a $1M mortgage, your additional monthly cost would be around $120. 

How that increase impacts you depends on the type of mortgage you choose. 

Variable. In this option, your payments are based on the going rate. Brokers generally recommend going this route rather than locking in to a fixed product – even if rates keep going up. (Keep reading to find out why.) 

Fixed-rate. Interest rate hikes won’t affect you until the end of your term: when you renegotiate, that’s when you’ll see the jump. 

But before you lock yourself in, there are 2 very important things you should know about fixed rate mortgages. 

1. The banks charge a significant premium for giving you that stability (it’s how they protect themselves against fluctuations). In a typical fixed-rate product, you’ll generally pay 1% above the variable rate. 1% is a lot…around $48 a month per $100K, or $240 a month for a $500K mortgage. 

2. Breaking a fixed-rate mortgage can come with massive penalties, often in the tens of thousands. And if you think you won’t break your mortgage, consider this stat: according to James, 6 out of 10 Canadians with a fixed product trigger a penalty. You never know when things will change in your life. 

But wait, aren’t the headlines saying interest rates could go up to 1.5% in the next year? 

The brokers I spoke to agree that this is a possibility, but not a certainty. And with interest rates currently at 0.5%, locking in to a variable rate mortgage that’s 1% higher will have you paying 1.5% now. 

Pay yourself instead of the bank

Here’s an interesting approach they recommend to clients tempted by a fixed rate product. Increase your payments to 1.5% as if you were locking into a fixed – but put it towards your mortgage instead of handing it over to the bank. That way, every extra penny will go to your principal instead of interest while you wait for the possible increase in rates. As that principal drops, you’ll owe less, and if interest rates rise, you won’t end up paying nearly as much as you would have if you’d locked in.

You’ll save thousands in interest, pay off thousands more in principal – and you won’t incur a sky-high penalty if you have to break your mortgage. Win. Win. Win. 

If you’re trying to figure out what’s best for you, a good mortgage broker is a fantastic resource. I recommend talking to one before saying yes to your lender’s offer to lock in. 

Do you have questions about this or any other real estate topic? Just ask!