How Prime Rates Can Affect Your Mortgage
Owning a home has become one of the best ways to build wealth over time. However, even with the benefits of homeownership, it can still be difficult to get a mortgage. One of the biggest factors that can limit your mortgage options is the Canada Prime Rate.
In this article, we go over how the prime rate can affect your mortgage, how they may affect your monthly payments and the possible solutions.
What is a Prime Rate in relation to mortgages?
According to Financial Post, a prime rate is a fluctuating number used to set interest rates on several different types of loans like variable rate mortgages. As the prime rate fluctuates (up & down), so will your interest rate.
If you have a variable rate mortgage with an interest rate of 3.25%, for instance, and the prime rate goes up, your interest rate will also rise by a certain percentage. As a result, a greater portion of your monthly payments will go toward interest on your loan, rather than reducing the principal. This means that even if your monthly payments remain constant, you will be paying more in interest charges, which can add up over time and increase the overall cost of your loan.
How Does the Prime Rate Affect Mortgages?
Different mortgage types interact differently with the prime rate. For instance, a fixed-rate mortgage won't be affected as the interest rate is “Fixed” at a pre-determined rate. On the other hand, a variable-rate mortgage will have an interest rate that is tied to the prime interest rate and vice versa. When the prime rate goes up, so does your mortgage interest rate. When it comes down, so does your mortgage interest rate.
It is important to understand your type of mortgage so you can anticipate what will happen to your mortgage payment. For example, if you have a variable rate mortgage where the prime interest rate has increased & in turn, so has your variable interest rate, and you haven't been increasing the size of your mortgage payments, the amortization period of your loan will be increasing as well as the amount of interest you will be paying over time. This means that your loan is growing as well as the amount of interest you will be paying on it.
The term "Trigger Rate" comes into play in an increasing-rate environment, where the interest rate for variable-payment mortgages rises without any corresponding hike in monthly mortgage payments. This can result in a higher percentage of the payment going towards interest rather than principal. The Trigger Rate is a threshold point at which the borrower's mortgage payment increases to cover the additional interest charges, causing a significant change in the borrower's monthly payment amount. Essentially, the Trigger Rate is the point at which the borrower's mortgage payment is "triggered" to increase due to an increase in the interest rate.
Here are some steps to minimize the impact of changes in the prime rate on your mortgage payment:
- Put extra money on your mortgage. If you have extra money, consider putting it towards your mortgage. This will reduce the amount of interest you pay and help you pay off your loan faster.
- Consider refinancing to a fixed rate. If you are concerned about rising rates, consider refinancing into a fixed-rate loan if rates start to climb again.
- Reach out to a mortgage specialist and talk restructuring. This could involve modifying the loan terms to reduce the interest rate or extending the loan term to lower the monthly payment amount.
- Speak with The Mortgage Center about adjusting your payment amount to accommodate the increasing interest rates that are causing the rise in loan amortization.
- Talk to a financial advisor or mortgage counselor to help assess your financial situation and provide guidance on potential solutions.
As of September 2022, the Canada Prime Rate was at 5.45%. This could bring a lot of confusion to new homeowners and homebuyers, who may be wondering what this means for their mortgage. The good news is that the Canada Prime Rate is not an interest rate, but rather a benchmark that lenders use to set their own rates.
That's why it's important to consult a mortgage specialist who can help you find the best option for your situation and answer any questions you have in regard to Canada Prime Rates and mortgages.
Contact Bonnie today to learn more about the Canada Prime Rate and how it can impact your mortgage, and get the guidance you need to make the best choice for your situation.