Variable Rate Increases - How Does This Affect My Mortgage?

2017-07-13 | 09:27:59

With variable rates set to increase by the end of July, here are some FAQs about how the rate change might affect you

*Note that this information only applies to variable-rate mortgage holders. If you are currently in a fixed rate mortgage your payment and rate will remain unaffected.

When Prime Rate changes, when does the change in mortgage rate become effective for me?

Your Variable Rate changes whenever your mortgage lender's Prime Rate changes, and comes into effect one business day after the change. Your mortgage lender will automatically issue a letter notifying you of this change. On the first payment after the change to Prime Rate, there may be no adjustment to your payment amount. On the second payment after the change, you will see that your payment has been adjusted to reflect the new higher rate.

Example:

Payment frequency is monthly

Next mortgage payment is July 15th

Date of Prime Rate change is July 12th

Effective date for rate change is July 13th

Effective date for new payment amount is August 15th

 

What will my new rate be if Prime Rate changes?

Your Variable Rate will be dependent on what decrement to prime you have with your rate. 

Example:

If your lender's Prime Rate is currently 2.70% 

And your rate is Prime   - .45 

Your Variable Rate Mortgage would currently be:  2.25%

If MCAP’s Prime Rate increases by .25  to 2.95% 

Your Variable Rate Mortgage rate would then be: 2.50%

 

Should I lock into a fixed rate now?

Whether or not you decide to lock into a fixed rate mortgage, depends on your ability to handle an increase to interest rates over time.  Historically, borrowers who stay in a Variable Rate Mortgage (VRM) tend to save more money over the course of the term. 

It is important to make an informed decision and to understand how Variable Rate Mortgages work.  It is also important to understand that locking into a fixed rate may cost you more money than what an increase in your VRM would be.

The following Mortgage Payment Calculator can be used to determine an estimated mortgage payment based on a new rate:

http://ryanwsmith.ca/mortgage-calculators

Importantly, for every $100,000 of mortgage you carry your payment will change approximately $12 per month, given a .25% increase to rates. This means on an average $300,000 mortgage your payment could change by $36/month. You can see by these rough numbers, that a change to rates doesn't necessarily equal a drastic change to your monthly payment.

 

Will I receive notice should my rate change?

Yes, if there is a change to your mortgage payment, a letter will be sent out to you.  Your lender may send you an email, a paper notice, or may update you via their online portal. If you're unsure or want to be updated immediately please don't hesitate to contact me and I can provide this information for you.

 

I increased my payment in the past to take advantage of my privilege payment options.Will my payment change if there is a change to Prime Rate?

The answer is yes and no. It depends on your lender, as some treat this differently than others. If your prevously increased payment is enough to cover your new minimum payment, some lenders may not make a change at all.

Others may increase your mortgage payment and be based on the new interest rate. The ongoing lump sum portion of your payment will remain the same. See below.

Example:

Principal balance on mortgage: $220,000.00

Prime Rate: 2.70%

Current rate: 2.40%  (Prime -.30)

Current P & I payment is: $974.60

Ongoing lump sum payment: $25.40

Total payment:  $1000.00


New Prime Rate: 2.95%

New rate: 2.65%(Prime -.30)

New P & I payment is:  $1002.04

Ongoing lump sum payment: $25.40

Total payment: $1027.44

*Another important note is that you have the ability to lower your optional payment increase, should you want to keep your payments lower in this scenario. This simply takes a request to the lender and you can drop down to you new minimum monthly payment, based on the new Prime Rate.

At any time, if you have additional questions not answered here, don't hesitate to contact Ryan W. Smith and Mortgage West Brokers at 250.682.0908 or rsmith@mortgagewest.ca

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