Canadians’ home-buying powers have been weakened by the Bank of Canada’s interest rate hikes, although that could be put into balance as home prices come down..The bank’s efforts in fighting inflation will succeed, it’s just a matter of time, says Romana King, senior finance editor for Finder, a personal finance comparison site..“What’s uncertain is how long it will take for this monetary policy to drive inflation back down to the bank’s target rate of 2%, and that means uncertainty for anyone looking to take on debt,” says King. ."For mortgage shoppers, this means deciding between the risks and rewards of an uncertain future. In practical terms, it means making a decision between a fixed-rate or a variable-rate mortgage.”.Choosing either option depends on your financial situation and comfort level..“The best option for risk-averse borrowers is a fixed-rate mortgage,” says King. “Locking-in provides stability and certainty.”.“Risk-averse borrowers are not chasing the possibility of amplified savings; they want stability and protection against further rate increases.”.Each .25% increase in the mortgage rate translates to an extra $1,160 in interest charges over five years for every $100,000 of mortgage debt..“For reward-motivated borrowers, a variable-rate mortgage may be a good option, since the lower rates will mean lower monthly payments and a reduction in overall costs,” says King..Make an extra $1,000 annual payment against your mortgage principal and you save $1,350 in interest, plus pay off the debt four years sooner. .King added: “The key is to combine these lower rates with a debt repayment strategy,” such as doubling up payments or an annual lump-sum repayment. .“The ability to save big is usually enough to offset even a significant rate increase since these borrowers are more concerned with minimizing overall costs and quickly repaying debt.”. For every .25% reduction in the mortgage rate, you save $5,800 over five years, based on a 25-year amortization on the average mortgage loan..“No matter the mortgage type, all borrowers will save significantly, if they compare mortgage rates,” says King. .For example, King says if a home buyer bought a home worth $630,000 (roughly the average national home price in July) and put 20% down, the mortgage would be $504,000. .“A home buyer could probably find a five-year fixed rate of 5.34% at one of Canada’s big banks, which works out to $3,030 monthly,” says King. “Shop around and a borrower can drop that rate to 4.34% to save more than $17,000 over a five-year term.”.Shopping around is more difficult for those renewing, says Victor Tran, a RATESDOTCA mortgage and real estate expert..“I have clients who took out a five-year mortgage in 2017 who are up for renewal in today’s very different mortgage landscape. Higher rates mean higher stress tests rates, making it difficult to qualify with other lenders,” says Tran. “They’re not able to take advantage of lower rates offered by other lenders and are instead limited to carrying over the mortgage with their current lender, who has no reason to offer them competitive rates. The ball is not in their court.”.Examples of mortgage payment differences for renewals:.Alberta.A homeowner in Alberta with an average new mortgage of $307,837* in Q3 of 2017 with a 25-year amortization at a five-year fixed rate of 3.76% would have a monthly payment of $1,579. Renewing in Q3 of this year with a five-year fixed rate of 5.5% with a 20-year amortization would result in a monthly payment of $1,826, a difference of $247..BC.In BC an average new mortgage of $389,430* in Q3 of 2017 with a 25-year amortization at a five-year fixed rate of 3.76% would have a monthly payment of $1,998. Renewing in Q3 of this year with a five-year fixed rate of 5.5% with a 20-year amortization would result in a monthly payment of $2,310, a difference of $312..Ontario.In Ontario an average new mortgage of $338,561* in Q3 of 2017 with a 25-year amortization at a five-year fixed rate of 3.76% would have a monthly payment of $1,737. Renewing in Q3 of this year with a five-year fixed rate of 5.5% with a 20-year amortization would result in a monthly payment of $2,009, a difference of $272. . Options to lower monthly payments at renewal:.Extend the amortization period, if possible Choose a shorter term, for example one or three years, to take advantage of potential lower rates in the future Choose a variable rate, which are still lower than fixed, though the spread is less than it was previously. .*Calculations are approximate and are based on CMHC and Bank of Canada data and calculated using RATESDOTCA’s mortgage payment calculator.
