January 17 saw the third Bank of Canada overnight interest rate rise in the space of just over six months, on the back of the strengthening economy.
This will likely lead lenders to raise their prime rates, which in turn will raise variable-rate mortgages, while the Big Six banks have already increased their posted fixed rates.
So how much will all this cost the average homeowner?
Responding to the first of the three recent rate increases, local mortgage expert Dustan Woodhouse said, “It’s not about the interest rate, that shouldn’t concern you – it’s about the effect that interest rate rise will have on the payment you make on your mortgage.”
Woodhouse said, “A quarter-point interest rate movement represents $13 per month, per $100,000 mortgage, for the average [variable-rate] mortgage holder. So that’s $52 bucks a month extra on the average $400,000 mortgage balance.”
This might not sound like a big payment shock, but add that to the previous two rate rises, and variable-rate mortgage holders with a $400K balance could now be paying on average $156 a month more than they were just over six months ago.
‘Few will be affected’
However, Woodhouse also pointed out at the time that the majority of local homeowners won’t be affected by an interest rate rise, as 50 per cent have no mortgage, and more than 80 per cent of the remaining mortgage payers are on a five-year fixed rate.
He observed that fixed-rate mortgage holders who are nearing the end of that five-year term will have locked in at a rate comparable to today’s interest rate, when they initially took out the mortgage four or five years ago, so they will see little or no payment shock when renewing. And those who are near the beginning of the term, already fixed at low rates, have time to adjust and pay down some capital before renewing.
Even the small margin of home owners who are currently on a variable rate mortgage might not see any payment increase either, according to Woodhouse. Many lenders’ variable-rate mortgages don’t increase monthly payments with a rise in interest rates – they just mean the owners pay back a little more interest and a little less principal each month.