Understanding how these changes work is key to making smart mortgage decisions. Here’s what you need to know about how interest rate changes affect your mortgage.
Fixed vs. Variable Rates: What’s the Difference?
Before diving into the impact of rate changes, it’s important to understand the two main types of mortgages:
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Fixed-Rate Mortgage: Your interest rate stays the same for the entire term. Even if rates go up, your payments don’t change until renewal.
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Variable-Rate Mortgage: Your rate can fluctuate based on the lender’s prime rate, which usually moves when the Bank of Canada changes its overnight lending rate.
How Rising Interest Rates Affect Your Mortgage
When interest rates go up, borrowing becomes more expensive. Here’s what that means for homeowners:
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Higher Monthly Payments (Variable Mortgages): If you have a variable-rate mortgage, your payments may increase almost immediately after a rate hike.
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Renewals May Cost More: If your fixed-rate mortgage is up for renewal, you could face a higher rate than when you first signed your term.
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Reduced Affordability for Buyers: Rising rates reduce the amount buyers can qualify for, since lenders stress test mortgages based on current rates.
Example: A 1% increase in mortgage rates could add hundreds of dollars to your monthly payment, depending on your loan size.
How Falling Interest Rates Affect Your Mortgage
When interest rates drop, homeowners and buyers can benefit:
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Lower Payments (Variable Mortgages): Your monthly payments could decrease, freeing up cash flow.
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Refinancing Opportunities: If you’re locked into a higher rate, refinancing into a lower-rate mortgage could save you thousands in interest.
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Increased Buying Power: Lower rates often mean buyers can qualify for larger mortgages, making homeownership more accessible.
What Homeowners Can Do During Rate Changes
Interest rates are outside your control, but how you prepare isn’t:
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Review Your Mortgage Regularly: Don’t wait until renewal — check if your current mortgage still fits your needs.
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Consider Refinancing: Locking into a fixed rate when rates are rising can protect you from future increases.
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Get Professional Guidance: A mortgage broker can help you understand your options and find a strategy tailored to your financial situation.
Final Thoughts
Interest rate changes can have a major impact on your mortgage, whether you’re buying your first home, renewing, or considering refinancing. Staying informed and reviewing your mortgage strategy regularly can help you save money and reduce financial stress.
If you’re unsure how current rates affect your mortgage, I’d be happy to review your options and guide you toward the best decision.
Contact me today to get personalized advice and take control of your mortgage in any rate environment.