How to Use the B.C. Mortgage Calculator to Assess Interest Rate Impact

Concerns Rise Among British Columbia Mortgage Holders as Interest Rates Increase

Poll Reveals Widespread Worries

According to a recent poll conducted by the Angus Reid Institute, mortgage holders in British Columbia (B.C.) are expressing serious concerns about the impact of rising interest rates on their financial well-being. The survey found that 25% of B.C. mortgage holders have variable-rate mortgages, which are particularly vulnerable to interest rate hikes. Furthermore, 32% of respondents stated that they still have 20 years or more remaining on their mortgage term.

Bank of Canada’s Rate Hikes

Since the beginning of 2022, the Bank of Canada has raised rates a total of nine times, subsequently driving up mortgage lending rates. On July 12th, the central bank increased its benchmark interest rate by another 25 basis points, bringing it to levels not seen since 2001. This decision was made in response to concerns that declining inflation could hinder economic growth. As a result, the central bank’s key interest rate now stands at 5.0%.

Impact on Mortgage Holders

The rising interest rates have significant implications for mortgage holders in British Columbia. As mortgage lending rates increase, borrowers with variable-rate mortgages will experience higher monthly mortgage payments, which could strain their financial budgets. Additionally, those who still have many years left on their mortgage term may face challenges in managing their mortgage payments.

Calculating the Impact

To help mortgage holders assess the potential impact of inflation on their mortgage, Global News has provided three mortgage calculators. These calculators can assist in determining how inflation will affect the mortgage, trigger rate, and the appropriate frequency of mortgage payments. It is advisable for individuals considering home ownership to take advantage of these tools to make informed financial decisions.

Advice for Mortgage Borrowers

Loan-to-Value Ratio (LVR)

When considering a mortgage, borrowers should familiarize themselves with the Loan-to-Value Ratio (LVR) used by credit unions and banks to determine the maximum amount that can be borrowed against a property. Conventional mortgages, with a down payment of 20% or more, allow borrowers to borrow up to 80% of the property’s value. For high-ratio mortgages, with a down payment of less than 20%, mortgage insurance is required. The Canada Mortgage and Housing Corporation (CMHC) is the main mortgage insurer, and they typically allow borrowers to borrow up to 95% of the property’s value for properties under $500,000. For properties between $500,000 and $1 million, borrowers can borrow up to 95% on the first $500,000 and 90% on the remaining amount. For properties over $1 million, a minimum down payment of 20% is required.

Affordability Assessment

Financial institutions assess borrowers’ affordability by considering their ability to make monthly mortgage payments along with other financial obligations. Lenders generally recommend that mortgage and property costs should not exceed 40% of a borrower’s income. For example, if someone earns $100,000 annually, they can afford a mortgage debt of $40,000 per year, which translates to approximately $3,300 per month. However, this calculation takes into account other debts, such as credit cards, car payments, lines of credit, and the borrower’s credit rating.

Choosing the Right Mortgage

When deciding on the type of mortgage, borrowers must consider their risk appetite and financial goals. Fixed-rate mortgages maintain the same mortgage payments and interest rate throughout the mortgage term, regardless of market interest rate fluctuations. Variable-rate mortgages, on the other hand, have mortgage payments and interest rates that change based on the prime rate set by the Bank of Canada. Interest-only mortgages are typically associated with Home Equity Lines of Credit (HELOC) and allow borrowers to initially make interest-only payments before transitioning to a conventional mortgage after completing property construction or renovations.

Payment Frequency

Opting for more frequent mortgage payments, such as weekly or bi-weekly payments, can help borrowers pay off their mortgage faster and reduce the amount paid in interest. Bi-weekly payments, which divide the monthly payment in two, result in two extra payments per year. This payment schedule works particularly well for individuals who receive bi-weekly employment income.

Dealing with Affordability Issues

If mortgage payments become unaffordable, borrowers should reach out to their mortgage provider for assistance. There are various options available, such as extending the mortgage’s amortization period or exploring alternative mortgage products like switching from a variable to a fixed rate. Additionally, generating income from rental suites within the property can help support mortgage payments. It is crucial to engage in open communication with the mortgage provider to find suitable solutions.

Early Mortgage Repayment

Paying off a mortgage early is generally considered a prudent financial decision. Most financial institutions offer pre-payment options that allow borrowers to make lump-sum payments annually, up to 20% of the mortgage, or increase their monthly payments. However, it is essential to consider other higher-interest debts like credit cards or lines of credit before prioritizing the early repayment of a lower-rate mortgage. Seeking advice from a financial advisor will provide borrowers with guidance on how to allocate any extra funds effectively.

Age and Employment Considerations

While mortgage lenders cannot discriminate based on age, borrowers must be at least 19 years old in British Columbia to enter into a mortgage contract. Employment status plays a significant role in qualifying for a mortgage, as a drop in income, such as retirement or transitioning to a higher-paying job, can impact a borrower’s mortgage application.

Amortization Period Selection

The choice between a short or long amortization period depends on the borrower’s financial goals. Opting for a shorter amortization period allows borrowers to pay off their mortgage more quickly and reduce the amount paid in interest. However, this also means higher monthly payments. Consultation with a mortgage professional can help determine the optimal amortization period based on individual financial goals and needs.

Mortgage Trigger Points

A mortgage trigger point refers to a situation where the mortgage payments made by the borrower no longer cover the loan’s interest. When this occurs, lenders will adjust the monthly payment amount, typically by increasing it. It is crucial for borrowers approaching their trigger rate to consult with their mortgage professional to explore all available options, such as increasing the amortization period.

Mortgage Brokers vs. Mortgage Specialists

While mortgage brokers can access multiple financial institutions, they may not have access to all options. Financial institutions, such as Vancity, offer mortgage specialists who can guide borrowers through the application process. Regardless of whether borrowers choose a broker or a mortgage specialist, it is essential to ensure that the professional acts in their best interests and finds a mortgage product that suits their needs.

Additional Homebuying Costs

In addition to the mortgage itself, there are several other costs that homebuyers should anticipate. These include property transfer tax, legal fees, property adjustments (e.g., taxes, water, sewer bills), home insurance, and real estate agent costs if selling a property. Being aware of these costs and factoring them into the overall budget is crucial for a smooth homebuying process.

Available Incentives

Several financial institutions offer cash incentives to borrowers when they close a mortgage with the institution. These incentives vary based on the mortgage size and the length of the term. Additionally, the Government of Canada recently introduced the First Home Savings Account (FHSA), allowing first-time homebuyers to save for a home tax-free. The account has an annual contribution limit of $8,000. Another option is the Home Buyers Plan (HBP), which allows individuals to withdraw funds from their Registered Retirement Savings Plan (RRSP) to buy or build a qualifying home.

Discount Points

Discount points are offered by some financial institutions, typically through brokers, to lower the interest rate on a mortgage. Borrowers pay an upfront fee to acquire these points, which can lower the rate by 0.25%. It is essential to calculate the break-even point of the transaction to determine whether purchasing discount points is worthwhile.

Plan Ahead and Seek Pre-Approval

To navigate the changing interest rate market and gain financial security, it is advisable for prospective homebuyers to reach out to a mortgage provider before searching for a home. Obtaining pre-approval will not only provide a clearer understanding of what can be afforded in terms of a mortgage and monthly payments but will also enable borrowers to make informed decisions.

In conclusion, the increasing interest rates have raised concerns among mortgage holders in British Columbia. Borrowers should carefully assess their affordability, choose the right mortgage type, consider payment frequency, and be prepared for additional costs related to homebuying. Seeking advice from mortgage professionals and financial advisors is crucial throughout the process to ensure the best decisions are made to protect individuals’ financial health.