Will Your Payment Rise By 45%?

If you are in a fixed rate mortgage, the answer is no (or at least not until your mortgage matures)!

If you are in an adjustable rate mortgage (ARM), your interest rate would need to more than double to reach that point.

Let’s have a closer look:

Let’s say you have a $500K mortgage and your current adjustable rate is 2.7%. Your payments are currently around $2300/mth. Your interest rate would need to go up by another 135% to 6.35%, for your payments to increase by 45% to $3335/mth.

Let me repeat: your interest rate would need to increase by 135% for your payments to increase by 45%.

Is that possible? Yes. But if you consider a 0.5% increase by the Bank of Canada as “extreme”, that would require over 7 “extreme” increases.

Now, let’s say that a household income of $110K qualified you for that $500K mortgage. That means in this example that you will be paying $12,420 more in payments per year. Depending on how quickly these increases were implemented, a 5% raise per year would way more than offset these increases.

Furthermore, when you qualified for this mortgage,  you were likely stress tested at 5.25%, so we already budgeted for the majority of these hypothetical increases.

Here is the best part: even if your rate jumped to 6.35% tomorrow (which it won’t), after 5 years you will have paid down that $500K mortgage to about $450K. So you have an additional $50K of equity in your home AND hopefully your home has also increased in value. What does that mean? After 5 years when your mortgage matures (sooner for many of you), you will likely have the option to increase the amortization by up to 25-30 years or more, resulting in a drop in your monthly payments again.

If in 5 years, the variable rate is still at 6.35%, and we amortize the balance of your mortgage over 30 years, your payments will drop from $3335/mth down to $2800/mth. That’s only $500/mth more than what you were paying before all of these increases.

We hope that puts everything into perspective when you see the news headlines “Mortgage Payments Could Increase By 45% by 2025”! 

PLEASE NOTE: this is one example for illustration purposes only. There are a lot of variables involved including remaining term, remaining length of amortization, current rate, mortgage amount, timing of increases/decreases in the prime rate etc. If you would like to discuss your specific case, please don’t hesitate to contact us!