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What Interest Rate Hikes Mean For Your Mortgage Renewal

What Interest Rate Hikes Mean For Your Mortgage Renewal

couple surprised by interest rates

couple surprised by interest rates

When interest rates are low, renewing your mortgage can be a breeze. However, with today’s higher interest rates, what was once a simple process can suddenly feel daunting. Unfortunately, for homeowners across Canada, this is becoming an increasingly familiar scenario. Since 2020, Canadian interest rates have been steadily inching upwards, signalling impending mortgage rate hikes when you’re ready to renew your mortgage term. Although it’s not what you want to hear, the reality is that the situation could be worse.

Let’s explore the world of interest rates a bit more to find out what to expect going forward and what you can do to save as much money as possible when you renew your mortgage this coming year.

A Little Interest Rate History

We’re all aware that interest rates have climbed over the past five years, but it’s important to take a step back and gain some perspective. Are today’s rates truly that high when we take a look at history? To grasp the current landscape of interest rates in Canada, it’s helpful to observe how these rates have fluctuated over the years.

Over the last half-century in Canada, the average interest rate has typically ranged between 5% to 6%. So, while it might feel like today’s rates are looming ominously above us, they actually fall within the normal range, all things considered. Granted, they might not be as astonishingly low as they were in recent memory, but they are still reasonable when viewed through the lens of history.

Over the past 87 years, Canada’s prime rate has fluctuated. From reaching a pinnacle of 20.03% in August 1981, when the Bank of Canada hiked rates to combat inflation, to plummeting to a record low of 2.25% in April 2009 amidst the financial crisis.

So, let’s shed some of that negativity about interest rates and be happy that, with a bit of preparation, renewing your mortgage doesn’t have to be stressful. And, when you work with an experienced mortgage broker like myself, you can rest assured that, you’ve looked at all the mortgage options available, and choose the lowest rate possible.

Before Your Mortgage Renewal Comes Up Stay Aware Of Interest Rates and Changes In the Market

Over the past decade, Canadians have experienced historically low interest rates, presenting a significant opportunity for first-time homebuyers. With borrowing costs reduced and home purchases made more accessible in certain markets, these low rates have been a huge help to first-time home buyers. However, when interest rates are at rock bottom, the only way they can go is up. And, knowing that has left buyers feeling uneasy, as higher interest rates could potentially impact their ability to afford a home.

In recent years, the Bank of Canada has aggressively increased interest rates from a mere 0.25% to 4.50% in efforts to combat inflation. Presently, Canadian interest rates linger between 4.50% and 5.00%, showing no signs of a significant decrease in the foreseeable future.

If your mortgage is up for renewal this year, brace yourself for the likelihood of higher monthly payments due to higher interest rates. For instance, if you secured a mortgage rate of 2.00% to 3.00% five years ago, anticipate the possibility of your interest rate doubling, or even tripling, upon renewal.

If your mortgage rate goes up 2% what does that mean in terms of your mortgage payment?

This is the question many homeowners are asking right now. Let’s look at the example below to understand better what this means for your monthly cash flow.

Let’s say right now you have $500,000 owing on your mortgage.

Your previous mortgage rate was 3.10%

That would mean your monthly mortgage payment would be approximately $2,392.

If your mortgage renews at 5.10%

That would mean your new monthly mortgage payment would be approximately $2,937

This means that you now need to find an extra $545 each month to cover your mortgage monthly payments.

What Affects Mortgage Rates?

When you’re applying for a mortgage renewal, the interest rate you’re offered depends on a number of things, which include:

  • The overnight rate is set by the Bank of Canada (BoC). This is the rate that banks borrow from and lend to each other in the overnight market;
  • Your history with your existing lender;
  • How good your credit rating is;
  • Whether you choose a variable or fixed-rate mortgage;
  • How long your mortgage term is;

In most cases, the overnight rate has the biggest effect on variable-rate mortgages. If the overnight rate increases, variable-rate mortgages go up. When it decreases, these rates go down. Fixed mortgage rates are based on the bond market which is less volatile.

Your credit rating is also a very important factor when lenders determine what mortgage rate to offer you. If you have an excellent credit score, you’ll be approved for better rates. If you have made your mortgage payments on time and never defaulted, your existing lender will offer you a more favourable mortgage rate.

How Often Does The Bank of Canada Rate Change?

The Bank of Canada can change interest rates eight times a year. The scheduled dates for the interest rate announcements for 2024 are as follows:

  • Wednesday, January 24
  • Wednesday, March 6
  • Wednesday, April 10
  • Wednesday, June 5
  • Wednesday, July 24
  • Wednesday, September 4
  • Wednesday, October 23
  • Wednesday, December 11

Why Does The BoC Change Interest Rates?

The BoC increases interest rates because, when they are higher, they encourage people to save. Since people are choosing to save, less borrowing and spending happens. That means companies may not increase their prices as much or even lower prices to get people to spend more. This reduces inflation since the cost of goods isn’t going up as quickly.

Lower interest rates work oppositely. Since it costs less to borrow money when interest rates are low, but you may also earn less from your savings, you may decide to spend more money. This increase in consumer spending causes prices to rise since people are willing to pay more.

The Bank of Canada uses these interest rate increases and decreases to control inflation and keep inflation at an easy-to-handle 2% a year.

What Does an Interest Rate Hike Mean For Your Mortgage Renewal?

When it’s time to renew your mortgage, your current lender will offer you an interest rate based on the current market situation. If your mortgage rate was fixed over the last 5 years, you’re definitely going to feel it. Taking the time to shop around for a better interest rate is certainly worthwhile which is why consulting a mortgage broker like myself is your best plan of action.

If you currently have a variable-rate mortgage, you have probably already felt the impact of higher interest rates. Choosing to renew this mortgage might offer a lower rate but it will be affected by fluctuations in the BoC rate. If you own a fixed-rate mortgage, you may pay a slightly higher rate but it is locked in for the length of your mortgage term.

What Are Your Options to Offset Fluctuating Interest Rates?

Interest rates can increase or decrease at any time, but there are a few ways that you can protect yourself. If you currently have a variable rate mortgage, there are other mortgage options that may be a better choice for you such as:

A fixed-rate mortgage. Most variable-rate mortgages will allow you to convert to a fixed-rate mortgage. You can consult with your lender to see if there are penalties or fees that you’d have to pay.

An interest rate cap fixes the maximum interest rate your lender can charge on a mortgage. You never have to pay more in interest than the maximum cap, even if interest rates rise.

A convertibility feature where, at any time during your term, you can convert or change your mortgage to a fixed interest rate.

A Hybrid or combination mortgage where part of your interest rate is fixed and the other is variable. The fixed portion gives you partial protection if interest rates go up while the variable portion provides partial benefits if rates fall.

You could renew for a shorter term so that once rates drop off again, you have the opportunity to renew at a lower interest rate if one is available at that time.

You could extend your amortization period so that you can keep your mortgage payment about the same amount by extending the period of time you take to pay back your overall mortgage. You will pay a bit more interest in the long run but, it might outweigh the interest rate increase so you will want to run the numbers to make sure this approach makes sense financially for you before taking this approach.

Want To Find The Best Interest Rates For Your Mortgage Renewal?

Don’t just sign back your mortgage renewal slip accepting the fact that your interest rate is higher than before. Start out early and do the research to find the best mortgage rates and renewal options before you sign on the dotted line. Even if you don’t have time to do the work yourself, calling me and asking me to find you the best rates and options for your next mortgage is the smartest thing you can do. I can offer you mortgage advice and find a way to keep your interest rates as low as possible while impacting your cash flow as little as possible. And, the good news is, you won’t have to worry about a stress test if you change lenders. There’s always a silver lining if you look for it.

Want to talk through your options? You can easily schedule a consultation with me at this link or give me a call directly at 705-315-0516. Don’t let interest rate hikes get you down, we’ll find a way for you to manage an increase in rate, it just takes a little elbow grease to get the job done.

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