Headlines making you think interest rates will be heading to 5% tomorrow? Could you afford them if they were?

With mortgage rates still at an all-time low, homebuyers are tempted to take advantage by jumping into the spring housing market. It’s true that mortgage rates are low now, but what would happen if interest rates went up by one or two per cent? Could you still afford your home?

Stephen Poloz, Governor of the Bank of Canada, said at a conference in April that the economy has room to grow before it can be considered to be firing on all cylinders, but even when it does — likely sometime in early 2016 — Canadians shouldn’t expect a sudden increase in interest rates to fight inflation. That’s heartening. While the economy might not be up to speed until 2016, most economists believe that rates will start rising some time in 2015. This, of course, is something we’ve heard before, but whether its 2015 or 2016, rates will likely start rising modestly sometime in the relatively near future.

With that in mind it’s a good time to stress test your mortgage just to make sure you know you can afford your home if and when there’s a mortgage rate increase. Too often, consumers focus on the total mortgage amount they qualify for instead of looking at their desired lifestyle and retirement goals. If you’re in the process of arranging a new mortgage, renewing a mortgage or refinancing an existing mortgage, then stress test it.

Let’s take a look at the impact on interest rate increases on a $250,000 mortgage with a 25-year amortization:

Interest Rate
3.5%
4.5%
5.5%
Monthly Payment
$1,248.17
$1,383.68
$1,595.27
Total Payments
$374,451
$415,104
$478,581
Total Interest Costs
$124,451
$165,104
$228,581
So, what’s affordable for you today might not be tomorrow. If you find that the results will have a negative impact on your budget, there are options and ways to protect yourself. One way is to opt for a longer term mortgage.
While it may seem like a safer option in a rising interest rate environment, keep in mind you will pay a higher interest rate than a shorter term mortgage. However, a longer term does give you some peace of mind knowing you have a set payment amount for the agreed term.
A longer term mortgage may not be for everyone. Another option is to take a shorter term mortgage at a lower rate and accelerate your payments by making payments based on the higher rate. By adding as little as $25 extra a month to your payments, you will generate significant interest savings. Add in a mortgage lump sum prepayment option and you’ll have a smaller balance and be less impacted by any increases in interest rates at time of renewal.
This option might not work for you either; however, there are more. Let’s tailor options that fit your particular financial situation and one that fulfills your lifestyle and retirement goals.
Call me, a professional Calgary Mortgage Broker, today and let’s stress test your mortgage.