How a Mortgage Rate Increase Can Negativey Impact Debt Payments
Taking out a mortgage is the only way for most people to purchase a property, but it isn’t always easy to get the credit you need.
As well as needing a substantial deposit, you’ll need to have a reliable income in order to obtain financing.
Prior to applying for a mortgage or viewing properties, it’s important to calculate your income and expected expenditure carefully.
When you’re doing this, remember to factor in potential changes to your interest rates.
Most people overlook the effects of mortgage rate increase on debt payments, but this can have a catastrophic impact on their finances.
If you are unable to cope with the added expense when interest rates rise, you could fall into debt problems and even be forced to sell your home if you’re unable to make mortgage repayments.
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When Do Mortgages Rates Increase?
When you take out a mortgage, it’s usually over a long period of time.
Known as the amortization period, the standard time it takes to pay off a mortgage in full is 25 years in Canada.
However, this doesn’t mean that you will pay the same rate of interest over this 25-year period.
Instead, most homeowners enter into five-year agreements throughout the course of their mortgage.
So, you may technically have a series of five-year mortgages until the debt is paid in full.
Each of these five-year mortgages is likely to have a different interest rate.
In fact, you can choose whether your five-year mortgage has a fixed or variable rate.
A variable interest rate can change at any time, whereas a fixed rate will stay the same over the five-year period.
At the end of the five years, however, a general rise in interest rates will mean you’ll have to choose another five-year mortgage with a higher rate, even if it is fixed.
What Does a Mortgage Rate Increase Mean in Real Terms?
If you have a five-year mortgage of $350,000 with a fixed rate of 3.59% and an amortization period of 25 years, for example, you will pay $1,769 in repayments each month for five years.
However, a five-year mortgage of $350,000 with a fixed rate of 4.59% and an amortization period of 25 years increases your monthly repayments to $1,963. Using the same figures, an increase to a fixed interest rate of 5.59%, pushes your monthly repayments up to $2,168.
As you can see, a 1% rise in interest rates means you’ll need to find an extra $194 a month to pay your mortgage.
A rise of 2% means you would need to find an extra $399 every month simply to keep up with your mortgage repayments.
Now take a look at your monthly budget.
If you’d struggle to find an extra $200 or $400 every month, it’s easy to see why so many people get into debt problems when mortgage rates rise.
In fact, a substantial number of people who file for insolvency do so because of mortgage rate increases.
Dealing with Financial Problems
If you’re experiencing financial issues because of interest rate increases, talk to us today and find out how you can overcome your debt problems.
Contact Bankruptcy Canada now on (877) 879-4770.