The rate hikes cometh: How to get your mortgage ahead of a rising rate environment

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Mortgage holders must conduct personal “stress tests” to determine how each rate hike will affect their wallets

Mortgage holders are keeping a close eye on the path of rate hikes and what they mean for rising monthly expenses. Mortgage holders are keeping a close eye on the path of rate hikes and what they mean for rising monthly expenses. Photo by Cole Burston/Bloomberg

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The era of ultra-low borrowing costs is over.

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When the Bank of Canada raised its key interest rate by a quarter point to 0.5 percent in early March, it made it clear that further increases were imminent.

“The economy is now at a point where it is appropriate to move to a more normal environment for interest rates,” said Tiff Macklem, the central bank governor, in a speech.

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As a result, mortgage holders are now keeping a close eye on the path of rate hikes and their impact on rising monthly expenses. The benchmark interest rate was 1.75 percent in February 2020 before the Bank of Canada cut borrowing costs to near zero to combat the COVID recession. It’s reasonable to expect that Macklem will aim to bring his target rate to at least that level to cool inflation, and maybe even slightly higher.

With more interest rate hikes looming, there are a few ways homeowners can move forward with their mortgage payments in a rising interest rate environment.

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First of all, not all mortgage holders will be affected equally: while fixed-rate mortgage holders are largely protected from the effects of rising interest rates until their mortgages are renewed, variable-rate mortgage holders will see their interest rates rise with any change in monetary policy. Canada’s largest lenders raised interest rates to 2.7 percent from 2.45 percent shortly after the Bank of Canada hiked interest rates.

Mortgage broker Ratehub.ca has compiled some numbers following the Bank of Canada’s announcement. Ratehub’s model was based on a homeowner who made a 10% down payment on a $700,000 home and opted for a five-year adjustable-rate mortgage with an initial interest rate of 0.9% that depreciates over 25 years.

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That combination left the Ratehub mock homeowner with a total mortgage of $649,530 and monthly payments of $2,418.

Ratehub found the homeowner could expect a 1.15 percent mortgage rate and a new monthly payment of $2,491 after the Bank of Canada’s quarter-point hike. That’s a jump from $73 per month and $876 over a full year.

Homeowners should use a mortgage calculator to estimate how interest rate increases would affect their monthly utility costs. Homeowners should use a mortgage calculator to estimate how interest rate increases would affect their monthly utility costs. Photo by James MacDonald/Bloomberg

It is still unclear how quickly the Bank of Canada will raise interest rates. That will depend on inflation and the extent to which Russia’s war with Ukraine damages the global economy. Some analysts are predicting up to six rate hikes by the end of 2022. Economists at the Bank of Nova Scotia predict that the Bank of Canada will raise interest rates to 2 percent.

James Laird, co-founder of Ratehub, told the Financial Post that homeowners should use a mortgage calculator to assess how interest rate increases would affect their monthly utility bills and find out how flexible their lenders are with mortgage terms.

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“The first thing they should do is find out whether their lender is in the group that is actually changing their mortgage payments, or whether their lender is changing the amortization,” Laird said, adding that mortgageholders should determine if their payments are increasing will.

“If so, compile the household budget based on the total payment amount,” he said. “They should also look at a few more rate hikes and see what that does to their mortgage payments and budgeting for them.”

Laird shared the same advice with fixed rate mortgage holders facing an upcoming renewal. Fixed rate people should do their research to get a better sense of how much more they could pay after the renewal and develop a budget for the new scenario.

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“If it’s taking a financial toll on the budget, that budget might consider refinancing rather than just an outright renewal,” Laird said. “It looks like they could keep the mortgage amount but could extend the payback to 30 years if they wanted and that would lower their monthly mortgage obligations.”

  1. The Financial Post's Gabriel Friedman covers rising interest rates and the Canadian housing market this week.

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  2. A real estate agent's for sale sign stands in front of a house that has been sold in Toronto.

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  4. Those with adjustable rate mortgages will be hit the hardest by rate hikes.

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Canadians with a home equity line of credit (HELOC) are also at greater risk of being overwhelmed by rising borrowing costs with every rate hike.

“If someone has a significant balance on a home equity line of credit that they don’t want to pay off with a large chunk of money soon, they should convert that home equity line of credit into a mortgage,” Laird said.

Laird added that HELOCs typically have higher interest rates than mortgages, so mortgageholders could refinance HELOCs and convert them to a floating rate prime minus rate (as opposed to a prime plus rate) or a fixed rate payment.

Ultimately, preparing for higher rates means that mortgage holders need to do personal “stress tests” and add up the numbers to determine how each rate hike will affect their wallets. If rising costs are making it difficult for homeowners to stay on top, it might be time to review your options.

• Email: shughes@postmedia.com | Twitter: StephHughes95

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