Will Your Payment Rise By 45%?

Let me ask you the same question worded differently; Will your mortgage interest rate triple? If rates triple, then payments increase 45%.

Let’s go deeper, using 2% as a starting rate, because that’s who the BOC is worried about – you 2%’ers. If rates double, to 4%, the payment rises ~25%

If rates triple, to 6%, the payment rises ~45%

Let’s talk about two things headlines and the news stories almost never cover. Real math and real money.

So here’s a few very real questions no headline is asking;  Are you making 1.5% more than you did a year ago? Are you making 6% more than you did in 2019?

Will you average a 1.5% raise per year over the term of your mortgage? Because 1.5% = 25% = 2X. Yes, a 1.5% raise, covers a 25% mortgage payment increase 5years later, triggered by the interest rate doubling.

Next question.  Will you average a 3% increase in gross household income over the 5yrs to renewal time? Because 3% = 45% = 3X

Yes, a 3% raise, covers a 45% mortgage payment increase 5years later, triggered by the interest rate tripling.

Now, am I saying a $980.00 increase to the monthly payment on a $500,000 mortgage isn’t a big deal? No. That’s real-world dollars, real math, and a real action plan.

If you’re worried that your 2% rate today (from 2021) is going to become 6% tomorrow (2026), then you need to average 3% more gross household income per year, every year, to cover that off.

Key Point: at renewal that 500K mortgage is knocked down to ~425,000 – that’s a $75,000 reduction in debt, aka a $75,000 increase in equity.

A $75,000 increase in your net worth, never mind the increase in your property value – which 4 years from now will also be a real thing.

Equity is power, more on this coming up.

Approximately 1 in 10 mortgages in Canada have a true adjustable rate, these are the ones with payments moving each time the Bank of Canada moves.

Next move due July 13, count on it being another big one.

But all of us qualified at 5.25%, even when our contract rate was saying 1.25%, we were still 5.25% stress tested.

And after the last three hikes many of us are at just 2.5%, less than half the qualifying rate used for approval. This suggests that… we will be OK.

Do we like paying more? Of course not. But can those who qualified for adjustable-rate mortgages over the past 6 months, or 4 years, afford to pay more?

Yes. Yes, they can.

There’s a lot to not like about what’s happening right now, the new words alone are a bit much…

All words that never really mattered before, now suddenly important for us to know. Things cost more.

Canada tends to follow the US, and what was the news out of the US last Friday?

Inflation at 8.9%, Gas up 49%, Grocery up 11.9%, Electricity up 12%, Rent up 5.2%

Will Canada’s number follow?  Probably, we are followers.

What do we know about Canada today, as in ‘this news just in’? That we’ve hit another all-time high for employment.             Good news right?  Who knows anymore. 135,400 new full-time jobs, 95,800 fewer part time jobs… hopefully the part-timers became full time.

A net gain of 39,000 people employed full time over 30 days.

Inflations not just limited to the cost of goods, wage inflation – the cost of people, is also running at 3.9%, up from 3.2% in April.

Hey wait, there’s that 3% we needed earlier 3% = 45% = 3X.  The (general) wage math is on track to cover a tripling of interest rates.

See… it’s all roses, rainbows, and puppy dogs.

OK not exactly, but keep in mind.

  1. You’re paying your mortgage down at an all-time record rate!
  • At renewal your 20yr amortization can be extended back out to 25, or very likely 30yrs if need be – which offsets any big interest hikes in an equally big way.

IE triple the rate or re-extend to 30yrs – and it becomes just a 22% increase in the payment.

And if things got really bad, would we see the gov’t bring back a 35yr option?  Yes, we should see that now in fact, it’s overdue.

And lastly for all the talk of ‘highly indebted households’… it’s not homeowning households. Since Jan 1, 2018 it’s a different buyer, due to the stress test.

Today’s homebuyer has zero consumer debt. Zero. They have amazing credit, great income, a solid down payment, and are on a record setting pace to pay down their mortgage balance thanks to rock bottom rates among other things.

As for those coming up for renewal today, they’re barely seeing a 1% rate increase, because back in 2017 fixed rates were at 3.79% (I told you not to lock in, I told you to stay variable)

I knew then what I know now.

Rule # 1 in mortgage world; Life is variable, and your mortgage should be too.

Also, it’s all going to be OK – really it is.

I’ve been saying this for more than two decades, decades of fear and loathing about ‘where it’s all going’

Smile, breathe, relax, turn off the news, put your phone down, go for a walk.

In the end everything will be OK, and if it is not yet OK, that’s just because it is not yet the end.

Hang in there.

Stay positive.

Stay awesome.

Stay variable.


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