Do Rising Interest Rates Have You Living in Fear? Here’s How To Overcome And Move Ahead!
When interest rates go up, mortgages become more expensive as their interest rate also goes up as well. This makes it more costly for consumers to purchase a home.
Recently, I have had almost daily conversations on this topic with my clients and people looking for support they cannot find from their bank or broker. Similarly, advice from family and friends is great. However, unless they do mortgages daily, they are unlikely to know of many of the intricacies that need to be considered during this time of higher rates.
Between variable and adjustable mortgage and renewal rates, property owners feel the budget pinch from rising costs. If you are considering taking out a mortgage in the near future, Keith Uthe Demystifying Mortgages, wants to offer you guidance on the matter. Here are the ways you can overcome the issue of rising interest rates and move forward with your mortgage.
1. Don’t panic
The first and most important piece of advice I can give you is not to panic and make a sudden or rash decision without having a discussion and reviewing your options with your mortgage broker. There are a few key considerations to making this critical decision.
2. Considerations to take into account when changing from a variable to a fixed-rate mortgage
The change of your mortgage from variable to fixed can be made without cost. However, you should be aware of the length of the term offered to make the change to a fixed rate. Also, be mindful that once you switch to a fixed rate, you can’t go back and that there could be penalties for the change.
Additionally, you need to consider what your net rate is with your variable rate discount. You may see that your rate is still competitive and lower than the fixed rate offered by the lender. Finally, consider your tolerance for the risk of a further prime rate increase against the payment for the fixed rate to ensure the decisions make sense and are beneficial to your situation.
3. Trigger rates for variable-rate mortgages with fixed or static payments
The rising prime rate has put many borrowers in a position where the amount of interest owed each month is more than their monthly payment. This is what activates the ‘Trigger Rate.’ When the ‘Trigger Rate’ is reached, the borrower must increase the monthly payment to ensure that at least the interest cost is covered. Similarly, the length of amortization is effectively increased as there is little or no principal paydown. This is unlike an adjustable rate mortgage, whereby the payment amount is automatically changed each time the prime lending rate changes.
4. Home Equity Lines of Credit (HELOC)
With Home Equity Lines of Credit, interest is based on the prime rate, so costs have significantly increased at the moment. If you have used a HELOC for non-registered investing and implementing the Smith Manoeuvre, the interest on those funds should be tax deductible. You can contact your lender and ask them to convert your HELOC into a term portion to potentially lower and protect yourself from rising rates.
Don’t know what the Smith Manoeuvre is or how to implement it? I am a Smith Manoeuvre Certified Professional and have used this myself.
5. Consider the length of term for your renewal or new mortgage
A shorter term of one to four years with a lower rate may be better for you budget-wise and give the economy to sort itself out to see where rates will be in the next couple of years. The US election cycle in 2024 could be a consideration around your term choice. A recent report from Moody’s indicate their expectation of a change in the interest and housing in Q4 of 2024.
For purchases and refinances mortgages, we need to consider the options for qualifying you for the most amount of mortgage if your debt servicing is over the allowed limits, so we can increase your approved mortgage amount.
6. Create a viable plan
What is your plan for the property over the next one, two, or five years? Do you plan to sell to upgrade for more space or downgrade for less space? Could you be transferred with your job?
Have you been considering moving to another city due to family or if the right opportunity came?
Will this property become an investment property? These questions should be answered so you can create a game plan.
A solid understanding, key information, and knowledge are critical to making decisions about your mortgage, and you shouldn’t do so without them. When you choose Keith Uthe Demystifying Mortgages, I listen, share and help provide insight. So I say, “Stay Calm and Mortgage On™️.”
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