It’s not the average price of a home in Oshawa, Whitby or Clarington. In 2008 the average detached home averaged $283,000. Currently, the average is $993,000. It’s not the price of a litre of gas. In 2008 a litre of gas was about .78 cents and currently, it is floating around $1.80.

No, it’s mortgage rates.

Last week Canada increased their lending rates to a Bank of Canada prime of 2.5%. (For context, at the beginning of January the Bank of Canada lending rate was .25%.) The country was anticipating a rate increase similar to the USA rate increase of .75% however the Bank of Canada turned out to be an overachiever. Here is how the rate changes will impact borrowers.

Before we dig into how the rate will impact borrowers, let’s look at “who” it will impact. If you have a fixed-term mortgage you will not be affected. I renewed a mortgage in January for a 3-year term, so the rate increases will not impact me. Anyone with a fixed-term mortgage that is up for renewal will be affected by the higher rates. Also, with variable rate mortgages tied to the lending rates, they will (as they have done over the past few months) be more expensive to service as the rates rise. Anyone applying for a new mortgage be it a variable or fixed term are at the mercy of the new rates. Credit cards, lines of credit and home equity loans will also be impacted. Here is what it might look like for a homeowner:

A homeowner with a $500,000 mortgage will see their payment increase in the range of $260 with this latest 1% mortgage rate hike. Most families can absorb an increase like this, however, when you factor in what has happened since March/22 it gets more dire. Since March/22 that same homeowner will pay $565/month more in payments. I don’t know too many families who can absorb a payment increase such as this. I have some thoughts on how to manage your finances as the rates creep up, given that the Bank of Canada has indicated that we are set to see more rate hikes as we move through 2022 into 2023.

• Pay off your credit cards – these are the first item to deal with. Pay these off first. The goal is to reduce the debt with the highest interest rates. Also, do a line-by-line look at your charges and cancel any expenses that looked good during a pandemic, and are just anchors currently.
   
• Investigate your Variable Rate Mortgage – if you currently have a variable rate mortgage, talk with your lender about locking into a fixed term rate. Variable rate mortgages were the rage when the prime rate was just over 0% however now they are becoming costly to service.
   
• Reduce your principal. If you have cash on hand, or any investments you can collapse, consider making lump sum payments on your mortgage. This will not affect the mortgage rates, however, it will reduce your principal offsetting some of the increase in interest charges.
   
• Consider lengthening the duration of your mortgage. This is called extending the “amortization” of your total mortgage payment schedule. This will lower your payments.
   
• Liquidate to pay down. If you have lines of credit, consider refinancing your mortgage to pay out the credit lines. Or, sell your boat, jet ski or trailer and pay off the loan.

This is a time when the “pandemic party” has given the last call…. the prudent thing to do is to take a hard look at where you are financially, make decisions on how to reduce your rotating payments and cancel any expenses that are not critically important.

Looking at the upside, a 5-year mortgage rate is in the 5.25% range and over the last 38 years of selling real estate, today’s rates are some of the lowest that Canada has dealt with. Over the past few years, our Real Estate values have increased dramatically, equity is up for all homeowners and once we get through this challenging time, we will be ready to put our party hats on and toast each other. We just have a bit of muddy water to tread before we get there.
 
If you have any questions with regards to your property, mortgages or help if you find yourself in trouble financially, I can be reached at lindsay@buyselllove.ca

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