How Do Rising Interest Rates Affect Your Mortgage?

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Rising Interest Rates & Your Mortgage


When interest rates rise, it can have several effects on a mortgage. Here are some ways in which rising interest rates can impact a mortgage in Canada:

Increased monthly payments

When interest rates rise, the monthly mortgage payments can increase. If you have a fixed-rate mortgage, your interest rate remains constant throughout the term of the loan. However, if you have a variable-rate mortgage, the interest rate is typically linked to the Bank of Canada’s overnight rate or other benchmark rates. As the benchmark rates increase, the rate on your variable-rate mortgage will also rise, resulting in higher monthly payments.

Affordability and borrowing capacity

Rising interest rates can reduce the affordability of homes and impact the borrowing capacity of potential buyers. Higher interest rates mean higher borrowing costs, which can decrease the amount buyers can qualify for. As a result, some buyers may have to adjust their home-buying budget, consider less expensive properties, or wait until rates stabilize to enter the housing market.

Impact on mortgage renewals and refinancing

Rising interest rates can affect mortgage renewals and refinancing decisions. When it’s time to renew your mortgage, you may face higher rates. This can increase your monthly payments if you choose to renew at the prevailing rates. Similarly, if you’re considering refinancing your mortgage to secure a lower interest rate or better terms, rising rates may reduce the potential savings and make refinancing less appealing.

Housing market activity

Increasing interest rates can influence the housing market activity in Canada. Higher mortgage rates can reduce demand for homes as potential buyers may be deterred or face affordability challenges. This can lead to a slowdown in home sales and potentially put downward pressure on home prices. However, it’s worth noting that the Canadian housing market can also be influenced by various other factors, such as supply and demand dynamics, government policies, and economic conditions.

Impact on variable-rate mortgages

Borrowers with variable-rate mortgages in Canada can be more directly affected by rising interest rates. If you have a variable-rate mortgage, your interest rate will typically adjust periodically (e.g., annually) based on changes in the benchmark rate. As interest rates rise, your mortgage rate and monthly payments can increase accordingly. It’s essential for borrowers with variable-rate mortgages to carefully consider the potential impact of rising rates and ensure they can manage potential payment increases.

As with any mortgage, the specific impact of rising interest rates in Canada will depend on factors like the mortgage terms, loan amount, length of the mortgage, and the borrower’s financial situation. Consulting with a mortgage professional or financial advisor can provide personalized insights based on your circumstances and the Canadian real estate market.