Posted at 5:00 a.m.
What to do ?
My mortgage is variable rate, what are my options?
If this is your case, you are already feeling the effect of rising interest rates. Especially if you make variable payments, that is to say, which adapt to increases in the Bank of Canada’s key rate, which has just made another upward leap.
If you have a mortgage with a variable rate but fixed payments, the portion of your monthly payment devoted to interest has increased in recent months.
Didn’t you realize that?
You may be in for a surprise if you reach what is known in financial jargon as the “trigger point”, where all the money paid in for the mortgage payment is used to pay the interest on the loan.
Some owners are also starting to receive calls from their bank asking them to adjust their payments.
What if I can’t increase my monthly payments?
“Go meet with your banker to find strategies before you start having late payments to the credit bureau, whether for the mortgage or other loans,” says Pierre-Raphaël Comeau, expert advisor in wealth management at the Laurentian Bank.
PHOTO MARCO CAMPANOZZI, THE PRESS
Pierre-Raphaël Comeau, Expert Wealth Management Advisor at Laurentian Bank
According to this financial planner, a package of strategies can be put in place, including those of extending the amortization or consolidating the debts in the mortgage.
People, he says, often wait too long before consulting a financial expert. Because they think they can get out of it or because they think they can’t.
People who have had their house for a few years are going to have more tools in their trunk than those who have just bought.
Pierre-Raphaël Comeau, Expert Wealth Management Advisor at Laurentian Bank
Seizure still exists, but it is rare and is a last resort.
How can you end up with a house that you can no longer afford?
When institutions agree to lend money, they calculate the risk. This qualifying rate is the borrower’s potential to pay, even if there are interest rate and payment increases.
We normally calculate the ability to pay 2% or 3% above the current rate, or above what the borrower will pay, explains Pierre-Raphaël Comeau, of the Laurentian Bank. “However,” he says, since March, rates have increased by 3.25%. Someone just passing through is going to be more vulnerable. »
Should I extend my repayment period and keep the same payments?
“If your choice is to stretch your payments or lose your home, the decision is easy to make,” says Serge Lafrenière, president of the brokerage firm Performance Mortgage.
According to him, a homeowner who needs to extend the term of his loan should not panic, because the current storm will not last very long.
“In two years, he will be able to reassess the situation,” says Serge Lafrenière.
His advice: someone who has adjusted their budget around new (higher) mortgage payments could keep them once rates come down and reduce their amortization period. Either way, the terms of the mortgage will have to be renewed.
Does it matter if I have to stretch the payments further than my planned retirement?
“Retirement is changing,” says Pierre-Raphaël Comeau.
“A good retirement plan is alive,” continues this financial planner. It must be adapted to current conditions. And if the expenses currently lack air, extend the amortization period. The date of the retreat will be adjusted. Planning is having the luxury of making choices. It is choosing rather than submitting. »
Who will be most affected by these increases?
“The people most in difficulty at the moment are those who have bought in the last 18 months”, estimates Pierre-Raphaël Comeau, of Laurentian Bank.
At the height of the pandemic, telecommuting was at its peak, as were property prices. Loans were accessible with low interest rates.
“These people took out a variable-rate mortgage to have the biggest house possible with the smallest possible payments,” said Mr. Comeau.
A client once told me: “We adapt when revenues go up and we adapt when they go down.” In this case, it’s the reverse. It is the payments that go up. The majority of people will adapt, will change behaviors, reduce the restaurant, change what they buy at the grocery store.
Dominic Claude, private banker at Desjardins Wealth Management
People from the middle class and the less well-off will obviously be more affected by the increases, recalls mortgage broker Serge Lafrenière. “A 2% increase is very important,” he said.
For example, Serge Lafrenière recalls that a 2-year fixed rate which is currently at 5.64% was at 3.09% last April.
People who renew their mortgage will be the most affected, he says, because this increase will have an immediate effect on their budget.
According to him, conversely, wealthy people should not be too bothered by this temporary rise in interest rates.
“I often say that some people are more afraid of the end of the world than of the end of the month”, image Serge Lafrenière to explain how the current situation affects everyone differently, mainly according to income.
Change now?
Can I change my mortgage during the contract?
It’s possible, but not ideal, explains Dominic Claude, private banker at Desjardins Wealth Management.
Normally, the variable rate pays more over a five-year period, he says. But we are in the opposite situation: those who took out a fixed-rate mortgage when rates were less than 2% are winners.
Result: “Since the beginning of the year, many people have come to see us to convert variable rates into fixed rates. »
Most change their minds when they realize their new payments would be calculated at the current, higher rate.
And that’s good, since there are no penalties when you go from a variable rate to a fixed rate, while penalties apply when you go the opposite way, says Dominic Claude.
The banker also advises against it for another, more behavioral reason. Someone making this move to secure themselves now would be tempted to go back to a variable rate when rates go down.
“He will want to be sure not to miss the boat, but when the storm is there, the storm is there,” said Dominic Claude. It’s not always the best choice to change ships at this time. »
I am about to take out a new mortgage. What to do ?
Do not take a five-year fixed rate, advises broker Serge Lafrenière with conviction. According to him, it is better to opt for a short-term variable rate and fix its rate when it suits us, if it suits us.
Even without having a crystal ball, we know that rates will go down in a year, a year and a half.
Serge Lafrenière, president of the Mortgage Performance brokerage firm
Each situation is unique and risk tolerance varies from person to person. “It’s always the first question we ask a client,” explains Philippe Simard, mortgage manager in Quebec at Ratehub.ca.
The recommendation will then be adapted according to the personality of the borrower. However, Philippe Simard is also leaning towards variable rates.
Especially in the past few days, since this last hike in the key rate. “The Bank’s prediction that inflation will drop to 3% by the end of 2023 makes a variable rate more attractive because when inflation falls, the Bank may decide to lower rates, which would reduce the variable rate mortgage. »
Should more fearful people opt for fixed rates?
“In general, yes, but not now,” says broker Véronique Beaudin, who works for Planiprêt in the Rimouski region.
Véronique Beaudin assures us that the best remedy against the financial stress caused by rising interest rates is education. “Yes, people are more nervous, but we manage to reassure them by explaining the situation to them. Result: many will opt for a variable rate, over two or three years, she says.
If the financial stress is too intense, broker Serge Lafrenière recommends taking out a short-term fixed-rate mortgage and taking advantage of this respite to better understand the state of your finances to then renegotiate your rate, once the bulk of the storm passed.
Many decide instead to delay their purchase, which leads to a slowdown in the market.
“A lot of people who were in the house hunting process are taking a break,” says mortgage broker Véronique Beaudin. Those who decide to buy now often do so because they are in a bad place. Those who have the choice will prefer to wait, especially since everyone is telling them that house prices will go down. »
My mortgage is at a fixed rate, can I be proactive?
“Make yourself a simulation. Look at what your payments would be at 5% or 6% and put the money aside or, even better, increase your mortgage payment now,” says Dominic Claude, of Desjardins Wealth Management.
“Anything that’s going to have been applied against the mortgage is less debt at maturity,” he said.