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Financial Friday #88: What to do About the Mortgage?
Time to Polish up your Crystal Ball and Renew the Mortgage
Most of us don’t have Bank of Canada (BOC) interest rate announcements penciled on our calendar, but much higher than targeted inflation and rapidly increasing home prices means rates hikes are most likely in the cards.
There are eight BOC interest rate announcements every year and the next one on December 8 is expected to leave rates unchanged. However, TD economist Sri Thanabalasingam believes rates could be raised three times in 2022 adding almost 1% to your mortgage. Scotiabank Economist Derek Holt is even more bold, he predicts the BOC will need to hike rates as many as eight times by the end of 2023 — that could add 2% to your mortgage!
We don’t have a crystal ball and two economists never seem to agree on much of anything, but it definitely looks like the cost of debt is heading upwards. The questions are: When and how much? & What do I do with my mortgage?
For existing homeowners, you could be looking at a several hundred dollars more each month by the end of 2023 if you have a variable rate mortgage. The stress test would imply that you are able to handle the increase, but the reality may prove different. Either way, you should be looking at the household budget to make sure you are ready to kick out a substantial amount more each month for the mortgage in the not too distant future.
There are a couple of other issues with looming interest rates hikes. Those who have pre-qualified may be in even more of a hurry to buy as their rates are only guaranteed for a few months. There is also a possibility that the mortgage stress test may become even stricter as economic uncertainty grows. Currently, you need to prove you could handle payments on a mortgage of up to about 5%. Further changes to that minimum requirement would mean that more people are not going to qualify, especially given ever-increasing home prices . The major consideration for most of us when it comes to higher interest rates is whether or not to lock in with a fixed rate mortgage or roll the dice with a variable rate. The difference between the two has recently widened as fixed rates have quickly climbed, and it can now be up to 1.5%. That’s what it costs you for the peace of mind to know that your payment will not increase by a nickel until the mortgage period expires.
Variable rate mortgages will cost you more every time the BOC raises rates, but they also have a long way to go before that 1.5% differential disappears. There are also repayment options, renewal options, penalties, and many other mortgage considerations - your best to seek the advice of a mortgage broker and see what’s best for you.
Understanding Canadian income tax If you are confused by the tax deductions on your paycheque, the tax rate you actually pay at your income level, the differences between taxes in each province, or whether you will be getting a cheque (or writing a cheque!) come tax deadline in April, this is the one article you need to read