As we have all seen in the news, we are now in a rising rate environment for mortgage loans.
While many have enjoyed historically low borrowing costs since the outset of the pandemic, it is important to remember a few critical items regarding current and future mortgage rates.
The first is that the interest rates Canadians saw during the pandemic should be treated as an anomaly, not the norm/expectation, so it’s important to have that mindset when compared to today’s rates. As well, if you are one of the many Canadians who either purchased a home or refinanced during the pandemic, you were most likely qualified for carrying that mortgage if you had an interest rate of 5.25 per cent or higher.
As per the B20 guidelines put in place in 2018 for insured mortgages, and later for conventional mortgages, all borrowers whose mortgage is with an OSFI-compliant bank/lender (or with a lender who chooses to follow these guidelines) have to be qualified to carry the mortgage at the greater of the Bank of Canada’s benchmark rate (currently 5.25 per cent) or your mortgage contract rate plus two per cent. This means you would not have gotten the approval for your existing loan unless your bank could prove you were able to pay for the mortgage with a much higher interest rate.
Regarding rates themselves, if you are currently in a fixed-rate mortgage, you do not have to worry about your mortgage payment or rate changing through your current term. Fixed rates are also based on Canada’s bond market, not the Bank of Canada’s Prime Rate, so if you currently have approval for a fixed rate you do not have to worry about whether or not a prime rate increase will affect your approval.
Lastly, we come to those in a variable/adjustable-rate mortgage. If you are one of these Canadians, you have a lot of flexibility with your mortgage.
While it’s best to speak with your bank or a mortgage professional about those options, some of them may include setting a higher payment rate than the minimum to offset any future rate increases; locking into a fixed rate (typically based on today’s fixed rates) at no cost provided the term is equal to or greater than the term you have left until your renewal; or if you are looking at possibly downsizing to another home with a smaller mortgage, or refinancing to consolidate some higher interest loans, or increasing your amortization to lower your payments if you are in a variable/adjustable-rate mortgage, you should only have to pay a three-month simple interest penalty calculation to break it early (typically calculated at either your current contract rate or the bank’s prime rate, multiplied by your mortgage balance and then divided by four), which means you won’t incur a large interest rate differential penalty you sometimes find when you have to break a fixed-term early.
Always remember that if you have concerns or questions about your current mortgage and how rising rates may affect you or your future plans, your best bet is to reach out to a mortgage professional who can help guide you through your options and provide education on the mortgage product you have today or the best product for your future goals and needs.
Jeremy Garth is a qathet region mortgage broker.
