S10 insight OCTOBER 2013
Enterprise
Managing Your Money
Your mortgage stress test M
ortgage loan interest rates have been reasonably low for quite some time – but it’s important to remember that rate changes are driven by various market conditions so are always fluid and changing. In the current economic climate – and partly as a response to the federal government’s introduction of more stringent mortgage standards to protect consumers from taking on too much debt – mortgage interest rates have increased. Increased rates means increased mortgage payments.
Often consumers are focused on the total mortgage amount approved by an institution instead of looking at the full needs of maintaining their desired lifestyle and retirement goals. If you’re in the process of arranging a new mortgage or are refinancing an existing mortgage, the questions you need to ask yourself are: How large an
increase in interest rate can I handle and is there anything I can do to reduce the stress of increases? Let’s answer those questions right now – beginning with the impact on interest rate increases on a $100,000 mortgage with a 25-year amortization. So … what is affordable for you today might not be tomorrow. One way to insulate yourself from shorter-term interest rate increases is to opt for a longer term mortgage. A longer term mortgage may seem like a safer option in a rising interest rate environment, but keep in mind you will pay a higher interest rate than a shorter term mortgage which means your total interest paid will increase. You will also likely face significant penalties if you have to renegotiate the mortgage during the term because of the need to relocate to another city, upgrading or downsizing to a different home, or need to refinance for renovations. A longer term does however provide comfort in knowing you will have
$100,000 mortgage with 25 year amortization Interest Rate
Monthly Payment
Total Payments Total Interest Costs
4%
$526
$157,804
$57,804
5%
$582
$174,480
$74,480
6%
$640
$191,941
$91,941
7%
$700
$210,123
$110,123
a set payment amount for the agreed term.
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.
If the longer term doesn’t work for you, another option is to take a shorter term mortgage at a cheaper rate and accelerate your payments by making payments based on the higher rate. By adding as little as $25 extra a month to your payments, you will generate significant interest savings. Add in a mortgage lump sum prepayment option and you’ll have a smaller balance and be less impacted by any increases in interest rates at time of renewal The type of mortgage, term and amortization period you select should be affordable within your monthly budget and fit with your longer term plans. Avoid stress and enjoy a calm financial future by talking to your professional advisor today.
Surander Singh
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