Panicked by rising interest rates? Mortgage specialists share tips to help alleviate stress
Mortgage specialists say they’re busier than usual these days fielding panicked calls from Canadians with variable mortgages or about to renew wanting to know how to save money on to rising interest rates.
Earlier this month, the Bank of Canada raised its key rate by one percentage point to 2.5%. This prompted Canadian banks to raise their prime rate to 4.7%, the highest in more than 10 years.
“What’s really interesting about what’s happening is the incredible speed of rate increases. … We’ve gone from 1.79 to 5.09 in a very short time – 22 months,” said Ron Butler, mortgage broker and one of the founders of Butler. Mortgage, which operates across Canada.
He says people are seriously worried about how far the rate will go, especially since it’s widely speculated that Canada’s central bank is set to raise its rate by 0.5-1.0% in the coming months. ‘fall.
“The horror show we’re living in right now just seems to go up and up and up,” Butler said.
Compare the prices
Butler says that if you’re a new home buyer or are about to renew, it’s worth looking around at the rates offered by different banks before signing any contracts.
“In today’s market, if one bank offers you 5.09 and another bank offers you 4.89 or 4.79, if there is a quarter or half percent difference , I mean, you would want to get it because literally every dollar counts,” Butler said.
But going to different banks can hurt a person’s credit rating, says BC-based mortgage specialist Angela Calla.
Calla suggests people use a mortgage broker instead to search for the best deals because their services are free — they’re paid for by the lender — and they can compare rates and options using a single app.
She says mortgage brokers are not biased towards any particular institution. She says they give pros and cons of products and services.
“There’s a whole big aspect of mortgage lenders and products that are only available through mortgage professionals, so consumers are completely restricted if they didn’t know that option existed,” he said. Calla said.
But she says they are not all created equal.
“We all manage our own practices and have different approaches and strategies on how we continually help individuals manage their mortgage to ensure they have the best strategy in place for market changes, as well than their personal lifestyle,” Calla said.
Fixed or variable?
Calgary mortgage broker Lori Grill says there’s no right or wrong answer, unfortunately.
She says both have their risks and benefits.
“Sometimes they want someone to tell them what to do, which I’ll never do. You have to make your own decisions about it. I can give you the numbers and give you my knowledge, and that’s pretty much everything,” said Grill, a specialist. with the mortgage group.
Floating rates are generally determined by discounting the prime rate. But they can also correspond to the first or be slightly superior.
Generally, variable rates are lower than fixed rates, but can sometimes float higher.
With variables, Grill says it’s important to focus on the long game and being able to ride out the peaks and valleys.
But for some, she says, paying a slightly higher fixed rate is worth it to gain stability in budget planning, especially when other things, from the price of groceries and gas to the pandemic , are unstable.
“These things are totally out of your control, but if you can control your mortgage payment, then maybe it’s time to lock in,” Grill said.
If you’re locking in to avoid future rate hikes, be aware that you may be taking it out on yourself if rates start falling again.
She remembers paying an interest rate of 13% in the 1990s in Calgary on a one-year fixed-term mortgage. She says she eventually decided to commit to a five-year fixed term at 11%, only to end up paying a penalty to break her mortgage to switch to a variable when rates started falling.
All variables are not equal
If you choose a variable rate, Grill suggests people increase their payments to match comparable fixed rate terms if they can, because that extra money goes straight to the principal and will help you pay off your mortgage sooner.
Butler says guidance is now more important than ever these days when it comes to variable mortgages that offer static payments regardless of rate changes.
This means that when the interest rate goes up, less of your payment goes towards the principal. In some cases, rates go so high that you hit what banks call a trigger point.
“The trigger point is when the interest increases so much in the mortgage payment that there is no longer any principle payment and you actually have a mortgage that increases every month because the payment does not cover the interest” , Butler said.
In these cases, banks contact the customer and either request a lump sum payment to cover the principal or drastically change the payment structure.
Butler expects to see more people with these types of mortgages hit their trigger points this fall if the Bank of Canada raises its rate another 75 basis points.
To avoid this, homeowners should now supplement their static variable mortgages, he says.
Other tips to reduce costs
Customers can change the frequency of payments, which are usually monthly, bi-weekly, and weekly. Accelerated biweekly and accelerated weekly plans are also options, but cost more during the year. Experts say the monthly amount tends to be lower than other offers.
They can also increase their amortization period.
But Butler says that requires a whole new mortgage application and not everyone may be able to qualify with the more rigorous stress tests now in place.
Instead of a five-year fixed term, people might choose a shorter fixed-term mortgage to see if rates will drop over that period.
“In 18 months, [the variable rate] could start to come down again. It will never sink as low as it was. It’s never going to be those super, super low rates you got in December. It won’t happen again for a long time,” Butler said.
Customers can also consolidate debt by adding it to their mortgage, Calla says, giving people more cash flow.
She says it’s important to cut expenses. Because she says that’s the point of interest rate hikes, to slow inflation. And she says maybe if Canadians heed the message, the increases will stop – at least for now.
But she says her best advice right now is for those with a mortgage renewal next year, get a hold rate today until you decide what to do.
Because she says no one really knows for sure what the future holds.
“No economist is 100% successful,” Calla said.
The economic factors that must occur for the Bank of Canada and the bond market to react to the market and decide what to do are based on influences over which no human being has control. »