What Rising Rates Mean for a Variable Mortgage

The Bank of Canada raised its key interest rate again on Sept. 7, this time by three-quarters of a percentage point.

For homeowners with a variable rate mortgage that fluctuates according to the key interest rate issued by the country’s central bank, the amount you’re paying toward your principal has decreased.

Given at least another rate increase is in store in 2022, signalled by the Bank of Canada in an effort to continue to battle against high inflation, what should you do?

The first thing is not to panic since there are options. Here are three.

Adjust your Payment
You can adjust your monthly payment amount to ensure that you still have enough going towards your principal balance.

Review your Amortization Schedule
Consider switching your amortization schedule from 20-year to 25-year, which is ideal if you already have equity in your home. However, if you’re already at your maximum amortization for your lender, you would need to increase your payment.

Switch to a Fixed Rate Mortgage
Many borrowers are now choosing to opt for a fixed rate mortgage to avoid the issue of increasing interest rates. Keep in mind, depending on your mortgage product, you may face penalties if you switch your mortgage mid-term.

If you are in a financially sound position and have ample savings, you may be able to pay your mortgage off entirely, depending on the total number of years remaining. Keep in mind there may be pre-payment penalties if you do so.