Is there any way to deal with mortgage increase?
Many homeowners are experiencing a painful squeeze as interest rates soar and home prices fall.
Variable mortgage rates in Canada have increased by 3.9 percentage points since the beginning of 2022, which represents an increase of more than 400 per cent this year alone, according to estimates from Ratehub.ca, a financial comparison site for mortgage rates.
In October, Canadian mortgage interest costs increased year-over-year by 11.4 per cent, the biggest increase since February 1991, when there was a 11.7 per cent jump, according to Statistics Canada.
As rates go up, more and more of your mortgage payment is going toward paying off the interest, rather than the principal. But is there a way to reduce your interest costs?
There is, but you might not like it, says James Laird, co-CEO of Ratehub.ca.
“The only ways to reduce interest costs are either to reduce the interest rate, which is beyond everyone’s control, or to pay down your mortgage faster,” Laird says.
“Obviously a lot of people will groan at our suggestion, because everyone is getting pinched on all ends right now,” Laird says. “But if you’re able to make a lump-sum payment, then that goes directly to the principle of your mortgage, and then you are immediately paying less interest.”
Laird encourages putting extra money or earned windfalls like employment bonuses toward a mortgage to keep interest payments in check.
Traditionally, borrowers could also consider switching from a fixed-rate mortgage to a variable-rate one to lower their interest payments, but Laird says that strategy won’t work now.
“Right now the difference between variable and fixed is very minor,” Laird says. “Usually variable is significantly lower than fixed, but at the moment they’re very, very close.”
He notes that there’s usually a break fee if you make the switch before your term is up, making it an even less appealing move.
“If you’re in the middle of a fixed term, you can’t break it then switch to variable unless you pay a penalty. So that’s not something that we would suggest doing,” he notes.
That leaves prepayments, which are extra payments you can make beyond your regular mortgage payments, to pay down the principal faster.
Laird warns that most lenders limit your prepayments to 10 to 20 per cent of the original mortgage principal and there is a penalty if you pay more. Prepayment penalties vary by lender.
When your mortgage does come up for renewal, rather than renewing at the offered rate automatically, it pays to take your time, do your research and look for the best possible rate for the new term.
“It’s very important to not just go with your own bank. There are many different mortgage lenders in the country and they’re all prime lenders. They’re all safe and secure.”
“Locking into a one-or two-year fixed-rate mortgage with the intention of riding out the current volatility in the mortgage market is a strategy that might work for some and not for others,” said Victor Tran, a RATESDOTCA mortgage and real estate expert.
“For those who are maxed out on their home expenses and can’t handle another increase, locking into a longer-term fixed rate might be a better option,” Tran says. “Additionally, short-term fixed rates are slightly higher than five-year fixed rates at the moment, so consumers would be paying more to be on this strategy.”
Part of the article was reported by the Star.