On June 7th, the Bank of Canada increased the target lending rate by 0.25%, bringing it to 4.75%. That is an increase of 4.5% over a 15 month period. If you got a variable rate mortgage in 2020 or 2021, you may find yourself struggling to budget the increases to your payment. Locking into a fixed rate will not only give you a sense of security and protection against future rate hikes, but the fixed rates currently available help you save in three different ways: your rate, your payment, and your amortization time.
Let’s go through an example based on a real Cannect case.
John and Jane Doe took out a $700,000 variable rate mortgage in June 2020 with an amortization schedule of 30 years. At the time, their Prime – 0.1% rate meant that they were only expecting to pay 2.35% for their debt. Now, that rate has been hiked to 6.85%. After a few months of their payments remaining constant, their lender told them that they had to increase their bi-weekly payment to around $2,100 in order to keep up with their amortization schedule. Cannect was able to present them with two fixed-rate alternatives:
1. 3-year fixed rate at 5.59% for $675,000 with a 25-year amortization. Requiring a bi-weekly payment of $1,915.58
2. 5-year fixed rate at 4.94% for $675,000 with a 25-year amortization. Requiring a bi-weekly payment of $1,799.32.
The new loan balance includes the cost to break the variable rate mortgage. Both of these fixed rate options drop John and Jane’s interest rate, their bi-weekly payment, and shave a few years off their amortization schedule as well. Or as we call it at Cannect, the Lock-in Trifecta! The Bank of Canada is signaling that rates may remain high for a little while. If you want to explore how much you can save on your rate, payment, and amortization period, give us a call and go through it with an agent today.
