Mortgage Getting Too Expensive? Here Are Some Options
By Stefan Walther | January 15, 2023
For nearly a decade and a half, it has been a remarkable and rather rewarding time to be a home buyer. Low mortgage rates have significantly enhanced home affordability for many buyers, creating soaring demand, fuelling the real estate market since at least 2008. Let the good times roll.
It was in December of that year that the Bank Of Canada brought down its central interest rate to the lowest it had been since 1958 — in 50 years! This was in response to the Great Recession of 2008.
Canadian banks responded in kind, lowering the interest rates they offer to customers.
And so all of us — consumers of goods, buyers of homes — enjoyed what would be 15 years of relatively low interest rates. Essentially, we could buy more stuff, and we could buy more expensive stuff, including bigger and better houses. Or, more accurately, put them on credit.
Sadly, all good things must come to pass. And pass they certainly did, just this past year.
In 2022, the Bank Of Canada raised its central rate from its absolute lowest in March, 0.25 percent, to its highest in 15 years, 4.25 percent, where it still sits now. The next BOC announcement is set for Jan. 25, in just over a week. We will be watching. (Update: Bad news, the rate did, in fact, increase 0.25 to 4.5 with the banks responding accordingly; good news, it is predicted to remain there for the next several months.)
Many home buyers, or even owners up for renewal, had been taking advantage of the lowest possible mortgage rate, which can be found in a variable mortgage. These are now not so low, not so attractive compared to what would have been their fixed-rate alternative (though still currently relatively lower as both have risen).
If you locked into a fixed-rate mortgage at some point this past year, you are breathing a sigh of relief. If not, if someone is still in a variable mortgage, they have seen their interest cost increase significantly, by hundreds of dollars, if not thousands, depending on the amount of the mortgage.
On a variable mortgage around $250,000, someone may have seen an increase in interest due over $700 per month. However, if they have a set monthly payment amount, they may not have noticed the increase in interest, but be assured a higher portion of that payment would now be going to interest, rather than the principal. And they may very soon hit a “trigger point,” if they haven’t already, where the amount of the monthly payment is no longer enough to cover the interest, never mind contributing anything to the principal. So, in effect, the mortgage is no longer being paid down, something called negative amortization.
So, what are the options if a variable mortgage is becoming too expensive and too difficult to manage?
ThunderBayHouses.com lists five ways below but, because these are not so simple, we did not title this article “5 Easy Ways To…” as is our usual theme.
1. Weather The Storm, Do Nothing — Many financial analysts predict interest rates are likely hitting the peak right now, will likely plateau, and may even come down 0.25 or 0.50 by the end of 2023. With inflation now stabilizing, the Bank Of Canada’s new challenge may be recessionary pressures, if not a mild to more serious actual recession. Lower interest rates are used to combat a recession. So if someone can weather the storm, they may choose to do so. They may still hit the trigger point and the financial institution may automatically raise the monthly payment, which may be by just enough and not too hefty, to ensure that at least the interest is being covered, if not much of the principal. If you are in this situation, your financial institution will notify you of both the trigger point, some of the options outlined here, as well as any new increased payment that may be coming.
2. Increase Payments — This is the simplest option, but may not be the most feasible if someone is already having difficulty meeting monthly financial obligations, that may not only include a mortgage but also groceries, utilities, day care, maybe a car payment, and more.
3. Make A Lump-Sum Payment — If the money is available, a lump-sum payment is directly applied to the principal and would bring down the interest that is due. This could be a quick and effective solution but may not work far into the long term should interest rates continue to climb.
4. Switch From Variable To Fixed Mortgage — Most financial institutions allow someone to switch from a variable-rate mortgage to a fixed-rate mortgage at any time. This would set the parameters of the mortgage, including set monthly payments, for the duration of the term, usually five years. This can make budgeting easier as the monthly payments would always be the same and would not be subject to changes in the prime rate, would be shielded from financial volatility in the marketplace, including from hitting a possible trigger point on the mortgage. As of the writing of this article, Jan. 15, 2022, RBC has special offers on a five-year fixed rate of 5.69 percent, five-year variable at 6.25 percent. Note that these rates are always subject to change.
5. Extend The Amortization — If this is possible, extending the amortization period of the mortgage may help lower the monthly payments and save on interest. However, this may not be possible and may, nonetheless, not be enough to make a big difference.
What is of the utmost importance is to know that there is no “one size fits all.” Each person is different, each person’s financial situation is different, each person’s financial goals are different — so one should contact a professional for advice and guidance.
ThunderBayHouses.com has been proud to partner with Jessica Coley, senior mortgage specialist at RBC Royal Bank, for many years. You can reach her with any questions or concerns that you may have, by E-mail at jessica.coley@rbc.com or by phone at 807-476-4867. Jessica has a wealth of experience and knowledge, having been in the financial and mortgage business for 20 years. Visit her website here.
There are many considerations when making decisions about how a mortgage is structured so that it best serves you and your family, takes into consideration all your best interests now and into the future, and gives you the best possible outcome for successfully owning your home and operating your household.
And if you may be looking to downsize your home, and thus downsize your mortgage, ThunderBayHouses.com can assist you to showcase your home in the best possible way and to the largest buyer audience, helping you attract the best offer and the top price — as always, with no commission. E-mail us or call 807-344-9393.
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