In this video we’re going to talk
about what happens to your mortgage payments
when you renew your variable rate mortgage
during a time when interest rates are rising.
And, we’ll cover some of the options you have
for managing those payments.
First, let’s talk about what happens
when you renew your mortgage.
Your mortgage comes up for renewal
when your mortgage term ends.
The term refers to how long your rate is set for.
Amortization, which is another part of your mortgage,
is the total length of time
it takes to pay off your mortgage in full.
Say you originally chose a 5 year term
and 25 year amortization.
When your mortgage first comes up for renewal
at the end of 5 years,
there would be 20 years left on the amortization.
At renewal, you will choose a new term
at mortgage rates available at that time.
This term, along with your new rate,
mortgage balance and remaining amortization
are all used to calculate your new payment amount.
Now, if your mortgage is coming up for renewal
in a rising interest rate environment,
your new mortgage payment could be higher than what you pay now.
How much higher will depend on a few factors
but some of the key ones include:
Your current mortgage type – whether it is fixed or variable
And your new interest rate
If you have a variable rate mortgage, your interest rate
may have already increased during your term.
As a result, during at least some of the term,
more of your payment would have been applied
to cover your interest
and less to paying down the principal.
This means your principal balance is being paid down
at a slower pace than it
otherwise would have been had interest rates not changed.
Consequently, your principal balance
at the time of renewal will be higher
than it would have been had interest rates stayed the same.
Let’s say your variable interest rate
increased from 2% to 4% in year 4 and 5 of your mortgage,
which means that more of your payment
has gone to paying the interest versus paying down
your principal over these years.
At the time of renewal,
the interest rate rises further to 5%.
If you started with a $478,000
mortgage with 25 year amortization,
your remaining principal after 5 years would be $17,348
higher than if the rates didn’t change during the term.
And, your monthly payment would increase from $2,026
to $2,758 upon renewal.
Nobody likes to see payments increase.
Fortunately, there are a few steps
you can take to lower the impact of changing rates
before it's time to renew.
You can make a lump sum payment;
you can Double-Up® your payments;
or you can increase your regular mortgage payment.
Any of these actions can help reduce your principal balance
and help lower the impact of a higher payment at renewal.
In addition to these options, there may be other ways
to manage your mortgage payments,
depending on your personal circumstances.
Some clients may be eligible to increase their amortization
period to help lower the payment amount.
We can help you take steps to manage your cash flow
and your mortgage.
Talk to an RBC advisor today!