Mortgages and Rising Interest Rates – What you need to know
In a few short years, interest rates have risen to more than five percent from 1.79 percent in late 2020. The low interest rate helped drive real estate sales and home prices upwards.
If you’re a new home buyer, or if your mortgage is coming up for renewal, there are several key points to consider. An interest rate increase of two or three percentage points means significantly larger mortgage payments. This is important to keep in mind as interest rates are expected to continue to rise.
The National Bank of Canada states that a family with the median household income of $78,000 a year will need 6½ years to save a minimum down payment of about $50,000 on a house or condo, which averages in Canada $770,000. In our region, we have not seen the exorbitant prices as the rest of country, but most families will still have to save for several years to make a minimum down payment.
- If you make a down payment of less than 20 percent, you will have to take out mortgage insurance, which increases your monthly payment.
- Making a larger down payment immediately boosts the equity in your home. This helps you build wealth as equity is a resource you can borrow against to improve your property or pay down other high-interest debts.
- A borrower pays more interest in the early part of the mortgage, then pays more of the principal in the latter part of the loan.
FIXED-RATE OR VARIABLE MORTGAGE?
•Fixed-rate mortgages allow you to fix your interested rate locking in your payments for whatever term you choose.
- A fixed-rate mortgage has slightly higher interest rates than a variable rate mortgage.
- If the market shifts, your interest rate won’t. This predictability allows for easier long-term budgeting.
- The downside of fixed rate mortgages is if the interest rate drops, you will be locked in at the higher market rate until it’s time to renew your mortgage.
- Based on your prediction of future interest rates, buyers may want to consider a shorter-term in case future interest rates decrease.
•Variable rate mortgages are generally lower than fixed rates but as they are variable they can rise higher than fixed-rate mortgages.
- Variable rate mortgages also have fixed terms but the interest rate fluctuates based upon the prime rate.
MY MONTHLY PAYMENTS
To understand how a rate increase could impact your monthly payment, check out our mortgage calculator, which allows you to plug in your mortgage at various interest rates. Or, better yet, contact one of our NPSCU mortgage advisors who can help you decide what’s best for you and your family 1-877-787-0361
Ted Pahl, CEO
Ted is passionate about Credit Unions, having served within the co-operative system across Canada for over 25 years. Ted’s longstanding career began front of house serving Members, as a financial services representative with Island Savings Credit Union on Vancouver Island back in 1994. Ted furthered his education and experience within the credit union system laddering into leadership at Kootenay Savings in Trail, B.C. where he served as the senior regional manager of retail sales and…read more