What happens to your mortgage payment if interest rates double??

KellyHudsonMortgages • February 15, 2016

Interest Rate in steal trap Oct25-15

Are you freaked out with the thought of rising mortgage interest rates?


One thing you can do to alleviate that fear is to educate yourself. Once you know your situation and facts, you can make an educated decision to worry about rising mortgage rates… or not!

Let’s ask few questions – what is your current mortgage rate? How much are your monthly payments?

What would happen if your mortgage rates doubled, when it comes time to renew (typically 5 years)? Will you be able to afford your home? Will you have to adjust your lifestyle?

Mortgage rates in Canada are tied to Bank of Canada lending rate – banks borrow their money from Bank of Canada, and then turn around and lend money to you and me.   They charge a bit extra (no surprise) – since they’re in business of making money.

It’s easy to understand now the Bank of Canada lending rate is tied to mortgage rates in general. If Bank of Canada brings their rate up, historically all banks follow the trend and raise their rates – because they don’t want to lose money.

Does a doubling of the interest-rate double your mortgage payment? The short answer is NO it does not.

Let’s discuss the math and the logic.

I have used 25-year amortization, the maximum allowed for purchases with less than 20% down payment. This is usually the first time home buyers – which tend to be the highest risk group.

I’ve used a $100,000 mortgage as an example, which makes it easy to do the math for higher mortgages.

Today
Mortgage Rate Amortization Term Monthly Payment Balance at renewal
$100,000.00 2.99% 25 years 5 years $472.73 $85,458.33
Renewal Time after 5-year term is complete
Mortgage Rate
2.99% x 2 		Amortization Term Monthly Payment Balance at renewal
$85,458.33 5.98% 20 years 5 years $607.67 $72,441.64

Doubling the original interest rate from 2.99% to 5.98% after 5 years – would create a 29% higher mortgage payment

One option for lower mortgage payments if interest rates doubled, would be to refinance and extend the amortization from remaining 20 years and push it out to 25 years.

Renewal Time after 5-year term is complete
Mortgage Rate
2.99% x 2 		Amortization Term Monthly Payment Balance at renewal
$85,458.33 5.98% 25 years 5 years $545.75 $76,751.41

Doubling the original interest rate from 2.99% to 5.98% after 5 years, refinanced to 25 years (instead of the remaining 20 years) – would create a 16% higher mortgage payment.

The net monthly payment increase, at the 5-year renewal would be is  $134.94 per $100K  of the original mortgage balance.

The net monthly payment increase, at the 5-year renewal refinanced over 25 years would be is  $73.02 per $100K  of the original mortgage balance.

Now for the Logic:

Think of how much money you made 5 years ago… do you make more money now? Do you think your household income will increase over the next 5 years? Do you think your additional income; would be enough to offset what you would pay if your mortgage rate doubled?

Over 5 years, an average family would experience an increase in household income.

BOC interest rate 2006-2016 Feb2016 How do rising mortgage rates affect you personally?

After looking at the math and the logic, clearly a doubling of mortgage interest rates would be unlikely to cause any kind of significant crisis for the majority of average homeowners, and there are options available:

  • refinancing your mortgage to lock into current rates
  • extending your mortgage term (typically 5 years) to 10 years
  • increase your current principal payment and accelerate your mortgage repayment – this way your principal amount is lower when you’re refinancing.

Rising mortgage rates in have been discussed for quite some time and will continue to be discussed as long as people have mortgages.

The best way to you prepare for the adversity of higher interest rates, is to shrink your mortgage balance as much and as quickly possible, especially with the current low mortgage rates so more of your money pays off the principle.

If you have any further questions about mortgages, please call me at 604-312-5009.

My services for a typical mortgage are FREE and I help people save money. I LOVE my job!

Kelly Hudson

Mortgage Expert

Mobile: 604-312-5009

Kelly@KellyHudsonMortgages.com

www.KellyHudsonMortgages.com


Kelly Hudson
MORTGAGE ARCHITECTS
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