In recent years, Canadians have grown accustomed to low interest rates. The Bank of Canada used low interest rates to encourage spending and spur economic activity during the pandemic. However, 2022 marked a sharp and painful turn for many. To combat rising inflation, the Bank of Canada raised interest rates bringing them to their highest level since 2008. These increases in inflation and interest rates have put enormous strain on many Canadians.
Mortgage debt is also not immune to these rate hikes. In Canada, there are two types of mortgages: fixed rate mortgages and variable rate mortgages. Depending on the type you have, you may be feeling the pinch of rate increases right now or later.
Fixed rate mortgages allow you to lock in a specific interest rate for a set period. If you locked in last year, you can breathe a sigh of relief, but possibly not for long. You may not be able to avoid the effect of the rate hikes even though you don’t have to pay an increased amount right now. Your mortgage will likely not be renewed at the same rate it currently is, and your monthly payment will then increase.
People with Variable Rate Mortgages have felt the immediate effects of interest rate increases, even though their payments may have not yet increased. Variable rate mortgages have two payment options: variable and fixed payments. For variable, payments have increased with each increase in the Bank of Canada's interest rate. This can put a strain on your monthly household budget you are now facing higher payments and higher cost of household goods.
If you have fixed payments, this is calculated and set at the start of the mortgage term. When interest rates rise, the portion of the payment servicing interest rises, while the portion of the payment that pays the principal balance of the loan falls.
Interest rate increases have the potential to cause significant distress in either scenario. Increases in mortgage payments can put a strain on your ability to service other debts and this may lead to anxiety.
If you’re feeling the stress of mortgage payment increases, there are a range of tools to help you assess your financial health and manage your finances. The MNP Debt Scale can assist in understanding how debt is impacting your financial health. The tool is quick, easy to use, and completely confidential. It can help determine where you’re struggling and what you can do to improve your situation.
If the Debt Scale confirms you may be struggling, an MNP Licensed Insolvency Trustee is always available for a Free Confidential Consultation. Together you can review your entire financial situation and discuss all the available options to help you begin moving in the right direction.
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