How are interest rate increases affecting mortgages?

In recent years, Canadians have grown accustomed to low interest rates. The Bank of Canada used low interest rates to encourage spending and spur economic activity during the pandemic. More people entered the housing market because of the sustained low interest rates and home prices across the country increased significantly.

However, 2022 marked a sharp and painful turn for many. To combat rising inflation, the Bank of Canada has raised interest rates seven times this year, bringing them to their highest level since 2008.

These increases in inflation and interest rates have put enormous strain on Canadians. The combination of higher fuel, grocery, and energy costs has increased expenses for everyone, leading to an increase in Canadians using credit.

Mortgage debt is also not immune to these rate hikes. In Canada, there are two types of mortgages: fixed rate mortgages and variable rate mortgages. Depending on the type you have, you may be feeling the pinch of rate increases right now or later.

Here's how rising interest rates are impacting both:

Fixed Rate Mortgage

Fixed rate mortgages allow you to lock in a specific interest rate for a set period. If you locked in last year, you could breathe a sigh of relief, but not for long. You will not be able to avoid the effect of the rate hikes even though you don’t have to pay an increased amount right now. Your mortgage will not be renewed at the same rate it currently is, and your monthly payment will significantly increase.

Take advantage of the current locked-in rates and start planning for the jump right away. Sit down with a professional to go over your budget, see where you can make changes, and if payments can be accelerated to lessen the impact of a renewal.

Variable Rate Mortgage

People with this type of mortgage have felt the immediate effects of interest rate increases, even though their payments may have not yet increased. Variable rate mortgages have two payment options: variable and fixed payments.

Variable Payments: If you fall into this category, your payments have increased with each increase in the Bank of Canada's interest rate. This can put a strain on your monthly household budget you are now facing higher payments and higher cost of household goods.

Fixed payments: This is calculated and set at the start of the mortgage term. When interest rates rise, the portion of the payment that goes to servicing interest rises, while the portion of the payment that goes to the principal balance of the loan falls.

If interest rates rise quickly, the payment may reach its trigger rate. This means it is now entirely interest. If interest rates rise above the trigger rate, banks may increase the amount of payment you’re required to make.

Interest rate increases have the potential to cause significant distress in either scenario. Increases in mortgage payments can put a strain on your ability to service other debts (credit cards, lines of credit, etc.), and this may lead to anxiety.

What you can do

If you’re feeling the stress of mortgage payment increases, our website has a range of tools to help you assess your financial health and manage your finances. The MNP Debt Scale will assist in understanding how debt is impacting your financial health. The tool is quick, easy to use, and completely confidential. It can help determine where you’re struggling and what you can do to improve your situation.

If the Debt Scale confirms you may be struggling, our Licensed Insolvency Trustees are always available for a Free Confidential Consultation. Together we’ll review your entire financial situation and discuss all the available options to help you begin moving in the right direction.