While many in the mortgage world anticipated rates to increase this year, I don’t think anyone expected them to increase so much and so quickly.
What we’ve seen is unprecedented. If you are in a fixed rate mortgage these rate increases won’t affect you until you reach the end of your current term. At that point you will need to carefully consider where rates are at the time and decide whether you are going to opt for a fixed rate again, and if so for how long.
If you are currently in a variable mortgage there are a couple of things that may be happening for you right now. If you are in an adjustable rate mortgage (ARM), your mortgage payment will have increased as prime has increased. That means that your remaining amortization is still on track.
It likely also means, however, you are starting to feel a pinch when making your mortgage payment. I know, I’m in an ARM and my payment has increased by more than $500 per month since March.
If you are in a variable rate mortgage (VRM), your mortgage payment will have stayed the same despite the rate increases but you are now at a tipping point, where the payment you are making may not even be covering the interest due on your mortgage. That can potentially mean either you are no longer paying down any of the principal balance or the principal balance is increasing.
That means the remaining amortization (length of time to pay off your mortgage) will be increasing as well.
For clients who are in VRMs, they are reaching what is known as the “trigger” rate (the tipping point I mentioned above). Financial institutions are starting to reach out to those clients to make alternate arrangements to make their mortgage payments.
Some of the options presented will likely include:
• Increasing your payment based on the current variable rate to bring the payment back to the point that it is paying down principal again.
• Make a lump sum payment and keep your payment the same.
• Convert to a fixed rate which will be increased to keep your amortization on track.
Whether you are in a VRM or an ARM, the increases to your mortgage payments smart.
Before you consider a knee-jerk reaction of locking into a five-year, fixed term, it is important to ask yourself why you are in a variable mortgage in the first place.
It is also important to do some serious thinking about your plans for the next few years.
While locking in for a longer term may feel attractive after how unsettling this year has been, if you are anticipating any kind of a major change to your life or your financial situation it may be a wise choice to stick with your original plan of the variable mortgage.
I am seeing a fair number of people choosing shorter, fixed terms in anticipation of rates softening again.
As a positive sign, I am starting to see rate specials posted by multiple lenders. This week, my favourite lender dropped its five-year fixed rate (for insured mortgages) from 5.84% to 5.44% and then again to 5.29%.
I think we will see rates drop a bit more before the next rate announcement on Dec. 7.
If you are struggling with the increased payments on your mortgage, I urge you to reach out to your mortgage person as soon as possible.
Lenders do not want to be in the foreclosure business, so most are open to working with their clients to find a solution that provides some relief and stability
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.