Can You Afford A $500 Increase In Your Monthly Mortgage Payment?
When you take out a mortgage, the only thing you tend to think about is whether you can afford your current monthly repayments – but what if they were to rise?
Could you afford to pay them then?
A survey by the Bank of Montreal has found that almost 1 in 6 Canadians would not be able to handle a $500 increase in their monthly mortgage repayments, with a further 27% of those surveyed stating that they would need to seriously review their budget and make cutbacks elsewhere to pay back the extra.
A $500 increase may seem like an unrealistic amount, but to put this figure into perspective, a $500 increase could come from just a 3% increase on a $300,000 mortgage over 30 years.
Although this 3% increase may not happen all at once, it could happen very quickly incrementally, with many smaller increases totalling a 3% increase over time.
Another survey, conducted by Manulife Bank of Canada, has also found that roughly 15% of homeowners would be unable to afford any increase in their mortgage rates at all, putting them at serious risk of missing their repayments if a rate hike were to occur.
Are you worried that you won’t be able to afford a mortgage hike?
If you’re worried that you may not be able to afford a rate hike on your mortgage, you’re not alone.
Just under 50% of Canadians report that their mortgage debt makes them feel stressed.
Although the possibility of a rate hike is concerning, there are things that you can do to prepare yourself for the event, such as paying down debt when interest rates are low, putting an emergency fund in place and reducing your amount of unsecured debt so that your money can be used where it is needed.
Paying down debt at lower interest rates
While interest rates are currently low, it makes the most sense for homeowners to try and pay as much of their current mortgage debts off as possible.
By paying extra on your mortgage while interest rates are low, you can reduce your total interest payments before the rate inevitably rises again.
Paying off extra on your mortgage when you have the funds available is a great way to reduce the overall amount you end up paying and could help you out in the event of a rate hike.
Creating an emergency fund
Ideally, every household should try to build an emergency fund to help them in financial situations where they need access to some spare cash, rather than relying on credit cards.
As a general rule, most people try to save enough to cover six months of their usual expenses, though even just a fraction of this can help you to get out of a sticky situation.
With an emergency fund in place, you can sleep soundly knowing that if a rate hike were to occur, you could access a little extra cash to top up your mortgage repayments.
Although not a long term solution, an emergency fund can be useful for situations where mortgage rates spike suddenly, before lowering once more.
Reducing your unsecured debts
If you have a lot of unsecured debt, such as credit cards and loans, then you may be using a lot of your monthly income on your minimum monthly repayments.
Although this may be something you can afford now, if your mortgage rates were to increase, you may begin to struggle to make all of your repayments.
To reduce the chance of this occurring, it’s wise to reduce the number of unsecured debts that you owe by paying off your credit cards and loans quickly or by seeking advice from a credit counsellor.
A credit counsellor can help you create a budget and speak with your creditors on your behalf about debt consolidation to help you meet your monthly repayments.
What to do if you are already struggling with unsecured debts
If you’re already struggling to make the minimum repayments on your unsecured debts and are worried about losing your assets, then you may want to consider speaking with a Licenced Trustee about the possibility of filing a consumer proposal.
Unlike filing for bankruptcy, your assets are protected with a consumer proposal, so you needn’t worry about losing your home or personal possessions.
By filing for a consumer proposal with a licenced trustee, you will agree to pay back an affordable amount of your unsecured debts over a period of up to five years, after which any remaining debt will be discharged.
We’ve helped thousands of people from all walks of life to get out of debt and have a team of dedicated advisors waiting to help you too.
Tools to help you budget for your mortgage and debt repayments
If you’re interested in seeing how the way you pay your mortgage and unsecured debts can affect the amount you pay, try the two tools below that will help you visualize how much money you could save by paying a little extra each month.
Enter your mortgage details, including your prepayment amount and prepayment frequency, and this tool will provide you with a mortgage payment schedule so that you can see how much money you could save by making additional prepayments.
The Credit Card Payment Calculator will show you how you can reduce the total amount of interest you pay on your credit card debt when using three different payment options (Making the minimum payment, paying extra each month, or paying a fixed amount)