Update: The Bank of Canada (BoC) just raised its trend-setting interest rate for a second time this year, up to 1 per cent from 0.75 per cent. The move follows a similar increase in July, when the Bank hiked rates from 0.5 per cent to 0.75 per cent.
Mortgages are Canadian families’ largest source of debt by far, so how will this affect them?
Global News has teamed up with rates-comparison site RateHub to provide a calculator that will show you how your monthly mortgage payments will change with rising interest rates. Please refer to the user guidelines below. (For more mortgage tools, you can visit RateHub.ca’s mortgage payment calculator or mortgage affordability calculator.)
READ MORE: What you need to know about mortgages if interest rates rise
How it works
General instructions: To use this calculator you need to know your current interest rate, amortization period, mortgage payment amount and payment frequency.
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Amortization period — this is the length of time it will take you to pay off your mortgage in full. In Canada, most mortgages have a 25-year amortization. This is different from your mortgage term, the length of time you commit to a specific rate, lender and loan conditions. The typical mortgage term in Canada is 5 years.
Payment frequency — most people pay their mortgage once a month. “Semi-monthly” means you pay twice a month, for a total of 24 yearly payments. “Bi-weekly” means you pay every two weeks, for a total of 26 payments a year. “Accelerated bi-weekly” means you pay the same amount you’d be paying with a semi-monthly option but make 26 rather than 24 payments per year, which allows you to pay down your mortgage faster and save on interest.
READ MORE: Interest rates could rise July 12: Who are the winners and losers?
Variable-rate mortgages: If you have a variable-rate mortgage, this calculator tells you how your payments will change when the BoC hikes rates. Today, rates went up by 0.25 of a percentage point. Many economists expect the central bank to raise rates by a full percentage point (up to 1.5 per cent) by the end of 2018.
Lenders don’t always mirror the BoC exactly. For example, the last time the central bank made a move, in July 2015, it cut rates by 0.25 of a percentage point, but mortgage lenders cut variable-rate mortgages by only 0.15 of a percentage point. “With an increase, however, it’s most likely the full amount will be passed along to consumers,” said to James Laird, co-founder of RateHub.ca and president of CanWise Financial. This is the working assumption of this calculator.
For highly anticipated interest rate changes, such as today’s hike, lenders generally adjust their variable rates within hours of the BoC announcement, said Laird. Variable-rate mortgage holders, in other words, will likely be affected immediately.
READ MORE: Here’s what happens to your car loan if interest rates rise
Fixed-rate mortgages: Most Canadians have fixed-rate mortgages with interest rates that hold steady through the length of the loan term. If that’s you, you can still use this calculator to get an idea of how your payments might change once your mortgage is up for renewal. However, keep in mind that if you have a five-year mortgage that will be up for renewal soon, today’s rates might still be lower than the rate you locked into five years ago.
READ MORE: Interest rate hike: Most Canadians would struggle to pay just $130 more a month, survey shows
Prospective homebuyers: If you’ve been eyeing a certain fixed mortgage rate over the past few weeks, today’s interest rate increase might not affect you. Most fixed-rates have already increased in anticipation of today’s hike, which was largely anticipated by markets. In all likelihood, the rates you’ve been seeing lately are the rates you’ll be able to access in the next little while. However, you can still use the calculator to see what your monthly payments might look like if you were to get a mortgage after the BoC raises rates again, which might happen as soon as this fall.
READ MORE: Home prices to remain flat across Canada in 2018, says RBC – is this the new normal?