How mortgage rates change your choices
THE HOME GUIDE · 18
How mortgage rates change your choices
A one-point change in your mortgage rate can affect your budget by hundreds of dollars a month. Here's what to check before making a decision.
ABOUT 7 MINUTES TO READ
SAME $500,000 MORTGAGE · DIFFERENT RATES
4% interest
$2,630/month
5% interest
$2,908/month
6% interest
$3,199/month
From 4% to 6%: about $569 more each month.
Illustrative payments, rounded to the nearest dollar, based on a 25-year amortization and standard Canadian fixed-rate mortgage calculation. Actual payments depend on your loan terms.
When mortgage rates change, most people look at the new percentage.
But the more useful question is what that change means for your own money.
It may affect the home you can afford, the payment you make each month, or the money left in your budget. Even if you have owned your home for years, rates can matter when your mortgage comes up for renewal.
01 / WHERE YOUR PAYMENT GOES
Your mortgage payment has two jobs.
Each regular mortgage payment generally covers two things.
This is the money you borrowed. Paying down principal reduces what you owe.
This is what the lender charges you for borrowing the money.
At a higher interest rate, more money goes toward interest costs. Depending on your mortgage, your payment may increase or less of it may pay down the principal.
That means the interest rate can affect how quickly you build home equity, too.
02 / FIXED OR VARIABLE?
Two mortgages can react very differently to rate changes.
Your mortgage agreement determines when interest rate changes affect you.
FIXED-RATE MORTGAGE
Your interest rate stays the same during your term.
If you have a five-year fixed-rate mortgage, your interest rate normally stays the same for those five years.
Your regular principal-and-interest payment is generally predictable during that term. But you will need to deal with the rates available when the term ends.
VARIABLE-RATE MORTGAGE
Your interest rate can move during the term.
Some variable-rate mortgages have payments that rise or fall with the interest rate.
Others keep the regular payment the same for a time. When the rate changes, the amount going toward interest and principal changes instead.
On a variable-rate mortgage with fixed payments, rising interest can leave too little money going toward principal. If the payment no longer covers all the interest, the unpaid amount may be added to your loan balance. This can increase what you owe.
Ask your lender what happens to your payment and loan balance if rates rise. The answer depends on your contract.
03 / TEST YOUR KNOWLEDGE
What happens when rates change?
Tap each question to reveal the answer.
Rates rise, but your payment stays the same. Does that mean nothing changed?
No. With certain variable-rate mortgages, more of your payment now covers interest. Less may go toward reducing your debt.
You have a fixed-rate mortgage. Do today's rate changes affect your payment?
Usually not during your fixed-rate term. The new rates become important when you renew, refinance or break your mortgage agreement.
Rates fall. Should you break your mortgage to get a lower rate?
Not automatically. A lower rate may save money, but breaking a mortgage can involve penalties and fees. Compare the total savings with the total cost of switching.
04 / THE RENEWAL QUESTION
A mortgage renewal can change your monthly budget.
Many Canadian mortgages have a shorter term than the time needed to pay off the full loan.
For example, you might choose a five-year term with a 25-year amortization.
TWO WORDS WORTH KNOWING
Mortgage termHow long your current mortgage agreement lasts.
The planned length of time to pay off the mortgage if payments continue as scheduled.
At renewal, you may still owe a large amount of money. Your lender will offer new terms, including an interest rate.
If the new rate is higher, your payment may rise. If the new rate is lower, you may have options to reduce your payment or pay down the loan faster.
Start comparing renewal options a few months before your term ends. You can ask your current lender for a better offer and compare other lenders.
05 / THE LOWEST RATE TRAP
The lowest advertised rate may come with trade-offs.
A low mortgage rate can look appealing. But there are other costs and rules that may matter later.
Prepayment rules: Can you make extra payments without a penalty?
Breaking the mortgage: What would it cost to end the agreement early?
Portability: Can you take the mortgage to another home if you move, and under what conditions?
Rate type: Is the rate fixed or variable?
Other fees: Will changing lenders or the mortgage agreement create costs?
A mortgage that fits your plans can sometimes be more useful than one with a slightly lower rate and restrictive terms.
06 / A SIMPLE COST TEST
Would switching mortgages actually save money?
Imagine a new mortgage offer could lower your regular payment by $200 a month.
MADE-UP EXAMPLE
Lower monthly payment
$200
Payment difference over 12 months
$2,400
Example penalty and switching costs
$5,000
The lower payment alone would take more than two years to make up $5,000.
But even that is not the full answer. You also need to compare the remaining mortgage balance, total interest costs and any changes in amortization.
The amounts are examples, not mortgage offers. A lender can provide a complete comparison using your actual loan details.
07 / FOR BUYERS AND HOMEOWNERS
How to put this information to use
Ask for payment examples at different rates. Include property taxes, insurance and maintenance in your budget. Leave room for unexpected costs. Consider what happens when your first mortgage term ends.
Start early. Get offers from more than one lender, compare terms and ask about the payment at each rate. Check switching costs before choosing.
Ask about your existing mortgage before making plans. Find out whether you can move it to another property or whether paying it off will create a penalty.
08 / SAVE THIS LIST
Six questions to ask before choosing a mortgage
1. What will my monthly payment be?
2. How much of each payment goes toward principal?
3. Can my payment or loan balance change during the term?
4. What will happen when I renew?
5. What will it cost if I move or pay off the loan early?
6. How much money will I have left for the rest of my life?
The rate matters. The full mortgage matters more.
A lower rate may help you buy, reduce your payment or pay off your loan faster.
But the result depends on the amount you borrow, how your mortgage works and what you plan to do next.
Understanding those details can help you choose a mortgage that works for your life, even when rates change.
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