The headlines today are shouting about the Bank of Canada increasing their benchmark rate by 0.5%. This may have an impact on your payments if you are borrowing money, but lets have a look at a couple of things.

First, if you are in a fixed rate mortgage, nothing is changing. If you are in an adjustable rate mortgage, your payments will increase. The important part of this though is that you are still more than likely making a smaller payment on that mortgage than if you had locked into a fixed rate. So that’s great. But how much has your payment changed? For every $100,000 borrowed, your adjustable rate payment goes up by about $25 a month with the rate increase. While this does have an impact on payment, this is still lower than a fixed rate payment.

That brings us to the second point. If you are looking now and are thinking that with rates increasing you should get a fixed rate, think again. Using that $100,000 value, the difference between the new adjustable rate and the fixed rate is $68 a month. Again, not a huge difference, but even though you are now paying more that you were last month, you are still paying less than a fixed rate.

Another important factor to remember is if you are looking to get a mortgage, you need to qualify with the stress test, and you need to have a higher income or less expensive house to qualify at a fixed rate than a adjustable rate.

Third, using those values, it is not the time to lock yourself into a fixed rate if you are currently in an adjustable rate mortgage. You are still making smaller payment, and with those payments, more is going into principal and less into interest than with the fixed rate payments.

In this increasing interest rate environment, you may get a direct call from your lender offering you the opportunity to lock in. They will make it sound enticing. But ask yourself why? Are they doing this for your benefit? Unlikely. They are doing it because they know it makes them more money, and they are working to make money for their shareholders. So if you get that call, say no thanks, and talk to your broker if you want to run some numbers, or just chat about these things. I am always available to work through this with you if you would like some assistance.

Remember, there is more to a mortgage than just the rate!

In Canada, when applying for a mortgage, the Office of the Superintendent of Financial Institutions (OSFI) requires that borrowers undergo a stress test to ensue that they can continue to make payments if mortgage rates were to increase. To do this, the lenders use an interest rate of 5.25% or your mortgage interest rate plus 2%, whichever is higher to calculate your payments. The calculated payments would is then compared it to your annual household income to make sure it fits into the allowed debt servicing ratios (a topic for another blog post).

For example, lets say today you could get a fixed rate mortgage 3.75%. You would have to qualify at that rate plus 2%, or 5.75%. However, if you could get into a variable rate mortgage at 2.2%, the stress test would be 5.25% (because 2.2% + 2% = 4.2%, and so 5.25% is higher).

This can make a difference to how large a mortgage you can qualify for. If you were hoping for at a fixed rate, but due to the stress test the value of the home you were hoping to buy is unattainable, looking at a variable rate may allow you to afford the home of your dreams.

Using an example of an annual household income of $100,000, the amount you can qualify for could be around $25,000 less with a fixed rate vs a variable rate using the above example rates.

If you have any questions or want some guidance with what value mortgage you can qualify for, please reach out.