The interest rate party for borrowers is almost over. Following almost five years of historically low rates, we’ve see a lot of upward movement in the cost of money.
Most people watch the central banks for indications that rates are about to take off. But that’s not where the real action is for fixed-rate mortgage holders. This actually takes place in the rarefied world of the bond market, where institutional traders like banks and pension plans operate. By the time the Bank of Canada gets around to acting, the bond market will have left it in the dust.
In order to save as much money as possible, a proactive approach is recommended when dealing with rising interest rates. Budget for future plans. Many borrowers opt for the maximum mortgage for which they can qualify. The problem with this approach is that life happens. It’s important to plan ahead for future changes such as starting a family, maternity leave, relationship changes, health issues, career changes, and so on.
Secondly, ensure you would still qualify for your mortgage if rates continue to increase. For instance, if the five-year rate reached 5.5%, could you still afford the payment? We can sit down and run the numbers to ensure we build a buffer zone into your mortgage.
Use your prepayment options. This will enable you to increase your payment in relation to the increased rate. For instance, if you have a five-year fixed mortgage at 2.89% and rates increase to 3.49%, increase your monthly (or bi-weekly) payment to the equivalent. That way, you won’t experience ‘rate shock’ when your mortgage is up for renewal. It’s important to remember that any extra payments you can make will go straight towards paying down your principal faster, which means you will be mortgage-free quicker.
It may be worth your while to take advantage of a free mortgage check-up before rates increase any further. This will help you determine if it makes sense, for instance, to renew your mortgage a few months early if this means being able to lock into a new five-year term before rates increase even more.
With rates on the rise, it’s more important than ever to take advantage of mortgage brokering services, since we can shop different lenders and advise which ones not only have the best rates, but also which lenders have the best prepayment options and mortgage offerings to suit your individual needs.
Jean-Guy Turcotte is an accredited mortgage professional with Dominion Lending Centres in Red Deer.