Will You Be Ready When Interest Rates Go Up?

With existing Canadian home sales surging 76 per cent, BMO takes a look at how to avoid the challenges that come with higher interest rates

The housing market in Canada has seen existing Canadian home sales surge 76 per cent from their January, 2009 lows. Not only that, in November, existing home prices spiked 19 per cent above year-ago levels, the second fastest clip in two decades. With record-low interest rates, more people than ever are looking to purchase a home. However, experts are predicting that interest rates will rise in 2010.

“We expect the Bank of Canada’s overnight rate target to climb from 0.25 per cent beginning in July 2010 to a more neutral 4.25 per cent in mid-2012. In turn, consumers can also expect mortgage rates to increase,” says Sal Guatieri, Senior Economist, BMO Capital Markets. “As long as borrowers keep in mind that renewal rates will likely be substantially higher, today’s ultra-low borrowing costs represent a unique opportunity to purchase a property.”

Top Tips to Consider
1) Make sure you can afford what you sign up for:
• Stress test your financial budget using a mortgage payment based on a higher interest rate
• For example, a customer looking to renew a $100,000 mortgage currently priced at 2.25 per cent could expect their monthly mortgage payment to increase by $100/month if rates were to increase by two per cent

2) Make pre-payments when you can:
• Pay weekly or biweekly instead of monthly
• Take advantage of the 20+20 pre-payment privileges.

3) Always make sure you save for a rainy day:
• If you are up to your maximum in debt, you may not be well prepared for a leaky roof along the way

4) Think carefully about fixed versus variable:
•While variable rate mortgages have been a winning strategy over the long-term, fixed rate mortgages come with the peace of mind from being insulated against rate increases and knowing how much of your mortgage you will have paid down at the end of your term

5) In today’s heated market, do not get locked into a bidding war that pushes your mortgage payments outside your comfort zone

“Think about not only what your financial needs are today, but a year from now, three years from now and five years from now so you can plan accordingly,” says Jane Yuen, Senior Manager, Mortgages, Bank of Montreal. “Always be on the lookout for ways to pay yourself first. You could be mortgage free faster and save tens of thousands of dollars in interest costs by simply changing your mortgage payment frequency from monthly to biweekly.”

Source: hometrader.ca