Rates are going up. What does it mean for you?
If you are currently locked in a fixed rate mortgage, there is no change. If you have a variable rate mortgage or are actively in the process of securing a new mortgage (buy, renew, refinance) then here is what you need to know.
Impact on monthly payment
As noted in a previous article, a 0.10% rate increase (ex. 2.49% to 2.59%) on a $100,000 mortgage accounts for approximately $5.00 increase in monthly payments. That’s about the price of one Starbucks specialty coffee or Dairy Queen Blizzard; easily absorbed financially (not to mention calorie-wise, as I’ve noticed since turning 40!).
Impact on interest expense
Keep in mind that the true cost is greater than just the immediate out-of-pocket expense. The actual interest expense for the rate increase in this example is $8.33 per month; so, while the additional ~$5 payment all goes toward interest, so does a portion of what used to be going toward paying down the principle. Evidently, the real cost is closer to a McDonald’s combo meal.
You can calculate the true interest expense of your increase as follows:
- New rate interest: $100,000 x 2.59% / 12 = $215.83
- Old rate interest: $100,000 x 2.49% / 12 = $207.50
- Difference: $215.83 – $207.50 = $8.33 per month
While a 0.10% rate increase over $100,000 loan is still negligible, it can be more significant as the size of loan and rate increases.
Impact on Average Mortgage Sizes in Canada
If the current changes see an average rate increase of 0.15%, what affect will it have on the average mortgage?
For CMHC’s average mortgage size of $176,000.00, a 0.15% rate increase means interest expenses rise by $22.02 per month. Think BP signature burger and a beverage.
For British Columbia’s average mortgage size of $320,000.00, a 0.15% rate increase means interest expenses rise by $39.74 per month. Two signature burgers, one beverage, and 2 straws.
The Bottom Line
The bottom line is that as much as the media hype can leave a gloomy picture, in reality the lifestyle adjustment is relatively minor on a month by month basis. And don’t forget (especially if these minor changes are a concern), there is far more to a mortgage than just rate, and the other factors could save (or cost) you thousands. Got questions? Let’s chat.
(For the record, I am not a fast food junkie despite the numerous references to the contrary. However, the apparent self discipline is largely necessitated by a variety of inconvenient food sensitivities, without which it might otherwise be different story!)