Say you get a mortgage with a five year term and a rate under 3% (as they are currently). What will happen in five years when you renew your mortgage? What will the rate be then?
Economists estimate that the interest rate will rise in five years up to as much as 5.5%. This means from one month to the next, at renewal time, you’ll experience what is called payment shock. This can be difficult on you and your family.
We at the Welch & Co. Team recommend adjusting your payments every year to match the current interest rate (keep in mind we offer free annual reviews!). The increased payments go directly towards your principal (thus actually paying down the mortgage) and will help you avoid payment shock.
This is also why the government, in 2018, introduced a stress test where you now have to actually qualify as if your rate was 5.19% (the Bank of Canada posted rate). This measure was taken in order to avoid potential future defaults on mortgages.
For example:
You get a mortgage loan of $250,000.00 at a fixed rate of 2.89% over five years (25 year amortization). This represents a monthly payment of $1,169.05 (excluding taxes). In five years, if economists are correct in their predictions, the same mortgage will cost you $1,525.98 a month. This represents a payment shock of $356.93!
However, after visiting the Welch & Co. Team for your free annual review, you’ve decided to increase your payment to match the payment associated with the 5-year fixed rate. In addition to preventing payment shock, you also benefit from a lower amortization and will save thousands of dollars in interest. Say you increased this same payment by only $40.95, your new amortization would be 23 years and 10 months and you would save $4,938.41 in interest!
Call us today to find out how you can utilize this strategy and see for yourself how you can avoid payment shock, reduce your amortization and save money, all at once!
