Are Rising Interest Rates Causing Anxiety 

Over the last couple of years, many buyers have been raving about the low interest rates. If you keep up with the latest news, you might not be happy seeing that interest rates are returning to how they used to be and even more.

When it comes to renewing your mortgage in the next three to five years, you might be stressed by how different rates can be. Do not drown in anxiety thinking about what could happen. Instead, read the seven methods below that you can do to manage your mortgage adjustments better.

Increasing Interest Rates

But first, let's look at the problem. Here is an example mortgage computation for a purchase price of $600,000. Let’s say you put a 20% down payment of $120,000. Your mortgage will be $480,000. If you have a 1.8% variable rate, your monthly mortgage payment will be $1,986.54 for 25 years.

In 2025/ 2026, if you are to have the same mortgage, assuming that the interest rate would be 4.4% by that time, your monthly payment would be $2,630. That is nearly $650 more per month just because of increasing interest rates.

Increase Your Monthly Payment

To prepare for the future interest rate increase, the first thing you can do now is to increase your monthly payment. For our sample computation, instead of paying $1,986.54 monthly, you can opt to add about $400 a month to be paid on your principle only.

Another option is to pay a lump sum to your mortgage once a year, ranging from 10%, 15%, or 20%. This will help you pay off your mortgage a lot faster and prepare your finances for what your monthly costs could be in the future.

Pay Off High Interest Debt

If you have high interest debt, you may opt to consolidate it and pay it off. It is best to tackle that debt quickly because it will free up cash for when you renew your mortgage.

Creative Ownership

Having creative ownership means finding a way to create other income streams from your property. For example, if you have a finished basement that your family is not fully utilizing at the moment, why not have it as a rental or register it on Airbnb?

If you don’t have a spare room, you may also try renting out your garage or any area in your home to have some extra income coming into your pocket from the property you already own.

And here is a little bonus tip, save the money you get from your creative income streams and put that towards your extra monthly payment.

Choose a Different Home

After doing all the calculations and adjustments, sometimes it is time to rethink if you picked the right home. Maybe this house really wasn't the best one, and you overextended yourself. Perhaps you just have to choose a different home.

Unfortunately, many buyers purchase right up to the top of what they can afford. If you realize that the increasing interest rates will affect your finances in the future, talk with your bank representative and real estate agent. Know the types of payments and penalties you might have if you cancel or change your mortgage.

Improve Your Credit Score

One great way to utilize your finances well is by improving your credit score. Consult a financial planner or a mortgage broker to create a plan on how you can use your credit cards wisely.

You may have open revolving accounts that you can pay off to get them out of your credit system. That will help you get better interest rates when it comes time to renew your mortgage.

Lock in at a Variable Rate

Contrary to many popular videos about locking in at a fixed rate, having a variable mortgage is actually a great thing when interest rates are increasing. It just depends on the type of variable you get.

Many buyers shy away from variable mortgages, thinking their payments will change monthly. There is actually one type of variable where the price stays the same. With a variable rate mortgage, your interest and principal rate will change every month, ensuring that their total sum will amount to your fixed monthly payment.

If you are paying $1,500 per month and interest rates are going up, there will be an interest triggering rate that will adjust the value of your principal and interest. The computation for your monthly payment will be different, but the monthly price will remain at $1,500.

Consider Longer Amortization

Back in the day, there used to be a 30 to 40 years amortization option, unlike the 20 or 25 years you see now. That might come back, and the Bank of Canada and CMHC may offer it again in the future.

Having longer amortization can bring down your monthly payment, so that is something to consider.

Let’s go back to our example earlier about the $600,000 property with a 20% down payment, leaving a $480,000 mortgage at 1.8% interest for 25 years. If you look at the end of year five on the amortization schedule, you will have about $400,000 left on the mortgage.

Upon renewing your mortgage in the fifth year with the remaining $400,000, assuming the new interest rate will be at 4.4%, your payment will be $2,500 monthly for the next 20 years. That will be an additional $600 a month.

But, if you decide to stretch the $400,000 amortization and push it to 25 years, suddenly, your payment will only be $2,193 from $1,900. Your monthly payment will go up by about $200 only.

If you want to learn more about the rising interest rates in Canada and how it affects the real estate market in Calgary, you can book a call with us, and we will be glad to help!