Like most consumer goods, food prices have not stopped jumping for several months now. And the nefarious duo of inflation and rising interest rates has weaseled its way into all areas of our lives, including our mortgages. Since mortgage payments are usually the biggest household expense, the current phenomenon is a serious threat to the financial health of homeowners across the country.
Simply put: inflation and personal finances are topping the Canadian worries list1 – so if you’re feeling concerned, know that you’re not alone. Keep reading to put a finger on what’s happening and how to get through it.
To help manage the inflation we’ve all been subjected to in recent months, the Bank of Canada has adopted monetary tightening measures to return balance to supply and demand, including encouraging less spending by ratcheting up borrowing costs. Which explains why Canada’s central bank has raised its lending rate eight times in a row since March 2022, taking it from 0.25% all the way up to the current 4.50%2.
For every Bank of Canada rate hike, financial institutions adjust the interest rates for the different types of variable rate financing (think lines of credit and variable-rate mortgages). Even though these changes affect the holders of variable-rate loans more directly, everyone risks being impacted eventually, e.g., when taking out a new loan or renewing a mortgage.
There are two variable-rate mortgage payment options available: variable and fixed. Variable payments are pinned to the lender’s preferential interest rate and therefore its fluctuations.
A fixed payment schedule for a variable-rate mortgage will keep your payments fixed, even when rates are rising. However, rates can’t rise endlessly without any impact on payments. A threshold—often referred to as the “trigger rate”—is set and when reached, the lender can adjust your payment amount, even if it’s normally fixed. The new amount will ensure you are able to continue to pay back the principal on your mortgage.
As the name implies, a fixed rate means stable, consistent payment amounts for the duration of the mortgage term. Borrowers who have signed on for this type of product won’t feel the effects of rate increases for a few months or even years, when it comes time to renew.
Getting approved for a new mortgage or refinancing an existing one is becoming increasingly difficult. This is because the qualification rates have increased to anticipate a borrower’s capacity to support future interest rate hikes.
For example, for your home loan to be approved, you’ll need to prove you can make payments based on the rate agreed upon with the financial institution plus 2%, which makes rate hikes even more difficult to manage.
You may have noticed that interest rates are going up with other financial solutions as well, e.g., lines of credit, credit cards, and personal loans. Make sure that you fully understand the fine print and potential impacts before signing anything.
Luckily, we are here to guide you and help you implement concrete actions to weather the storm. Here are some personal finance life preservers that you can grab hold of, starting today:
Cut down on spending: Take a second look at your spending habits. Can you make certain purchases later, or not at all? Try out other ways to save, too, like shopping second hand or choosing generic brands instead of more expensive labels. Downgrading your TV, internet, and phone plans is also a straightforward fix. When you start paring down your spending to only what’s absolutely necessary, you’ll have more money for what’s really important.
Update your budget: These days, having clarity around your income, budget, and expenses is more important than ever. In addition to updating your expense list with ever-rising prices, try to stick to your revised budget as best you can. A good practice for variable rate borrowers could be to invest the difference between their current monthly payment and the required payment had they chosen a 5-year fixed-rate mortgage.
Set up an emergency fund: Bad luck can befall anyone, at any time, without warning. And the list is unfortunately almost endless: a broken appliance, a lost job or, in this economy, bigger mortgage payments. Protect yourself by tucking away a small amount of money into an emergency fund every month. Your future self will thank you.
Fine tune your financial plan: Explore all the possibilities for lightening your budgetary load. A Laurentian Bank advisor can help you decide which ones are right for you. It might involve switching to a fixed-rate mortgage, refinancing your current mortgage debt, or extending your remaining amortization (if possible). There are solutions for every area of your life, as well, such as switching to a more budget-friendly vehicle or picking up new, thriftier grocery shopping habits.
Pay less interest: If you have a budget surplus at the end of the month, it’s advisable to use these funds to pay down your highest-interest debt first. If you’re in the red instead and you’re having trouble making payments, it would be wise to contact an advisor who can help you consolidate your debt into products with lower interest rates.
For solutions related to short-term financial challenges, contact your advisor today and explore your options.
You’ve made a great decision to buy a home and finance it with a mortgage. Now, rising interest rates mean you may need to re-prioritize your spending, and we’re here to help.
Reach out to a Laurentian Bank advisor today. Because when it comes to navigating these uncertain financial waters, sound advice can make all the difference.
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