By Alisa Aragon-Lloyd, as seen in "New Home + Condo Guide" magazine, May 28, 2022
The Bank of Canada has increased its overnight policy rate in the past few months, and it is expected that in its upcoming June announcement, there will be another increase that will affect variable interest rates. As well, fixed interest rates have increased dramatically over the last few weeks and months and the expectation is that interest rates will continue to trend upwards. Therefore, it is important to be proactive and prepare yourself for higher interest rates. The following are some tips that can help you.
1. PAY DOWN YOUR MORTGAGE FASTER
To ensure that you don’t over-leverage yourself when interest rates continue to increase, start by making larger or more frequent payments and make lump sum pre-payments, when possible, towards your mortgage. This will help you by lowering your principal so you will pay interest on a smaller amount in the future.
A LUMP SUM PAYMENT. Most lenders allow you to pay annually up to 10 to 20 percent of your mortgage without a penalty. The prepayment amount is applied directly to the principal balance, which will help you save money. If you are getting at tax refund, apply that money to your mortgage to pay it down. This will allow you to increase the equity in your home.
CHANGING YOUR PAYMENT FREQUENCY. This is a great way to pay off your mortgage faster. You can benefit by paying the same amount per month by just simply splitting your mortgage payments throughout the month to semi-monthly or change your payments to bi-weekly or weekly payments.
2. PAY DOWN YOUR DEBT
If you are only making minimum payments on your credit card, it would be a good idea to start paying more. Even as little as $5 more on each card will save you twice as much. Review your budget or start a budget to see where you can cut your spending and start paying down your credit card debt with the money you save. If you are living beyond your means, it won’t get any easier with time. It is better to become proactive, instead of getting in a tighter situation later, especially when interest rates continue to rise. If you are looking at buying a home, calculate what the payments will be with a higher interest rate and see if you would be comfortable making those payments in the long run. If not, purchase a property of lesser value.
3. REFINANCE
By refinancing and leveraging your equity in your home, it is a great opportunity to pay off some debts and increase your monthly cash flow. You can also use some equity for investments or use funds to purchase an investment property. Speaking with a mortgage expert can help you explore the many options available to you!
4. HAVE A CONTINGENCY FUND
If you are concerned about higher interest rates when your mortgage comes up for renewal, start working on it now. It’s a good idea to create a contingency fund that can be used to cover the increase in mortgage payments or you can use that fund to make a lump-sum payment on your mortgage. If you are on an adjustable mortgage, figure out what your mortgage payments would be if you had a fixed rate and put that extra money aside. By making small changes in your daily spending, you can save more money in the long run.
5. SEEK PROFESSIONAL ADVICE FROM A MORTGAGE EXPERT
A mortgage expert can keep you updated on how the changes in the economy affect you and your mortgage. He or she can help educate you in areas in which you are unfamiliar. Also, if you want to find out how you can leverage what you have and how to grow your financial wealth, they can help you to explore all of your options.