On December 6, 2023, the Bank of Canada announced it would be holding its overnight lending rate at 5%.
If you're a homeowner, and you've taken even a cursory glance at the news lately, chances are you've thought about what current high interest rates could mean for your mortgage.
For more than a year, persistent inflation and changes to interest rates have generated headlines. With inflation finally cooling, the Bank of Canada has held the interest rate at 5%. The Bank of Canada’s benchmark rate serves as a reference point for the interest rates that financial institutions charge to their customers.
For homeowners, it's critical to understand the potential impact that the current interest rates could have on their mortgage or other loans, and corresponding payments in the year ahead.
To help answer some key questions related to high interest rates, we talked to Albert Lee, District Manager and Mobile Mortgage Specialist at TD, who shares his advice on what homeowners need to know about higher interest rates and their effect on mortgage rates, and what the future may hold for homeowners in 2024.
Revisit the terms of your mortgage
"The first thing you're going to want to do is take an inventory of what your current situation is," said Lee.
"Do you have a fixed rate mortgage? Or a variable rate mortgage? What is your renewal date? What is your current interest rate? How much will you still owe on your mortgage when it's time to renew? These are all important questions to answer so that you can understand your current situation and start thinking about if your situation still serves you best."
To learn more about the differences between fixed and variable rate mortgages, check out this TD Stories article on the differences between the two.
If you've taken out a mortgage in the last 3-4 years, your interest rate could be much higher when it's time to renew. That means, if you want to continue to meet your original mortgage amortization schedule, your mortgage payments could go up.
As a result, you may want to review your options, to determine if your mortgage situation can continue to suit your individual financial goals.
Variable rate
With a variable interest rate, the interest rate can fluctuate. At TD, your principal and interest payments will stay the same for the term, but if the TD Mortgage Prime Rate goes down, more of your payment will go towards the principal. If the TD Mortgage Prime Rate goes up, more will go towards interest.
If you currently have a Variable Rate Term Portion, your interest rate will fluctuate with changes to the TD Prime Rate.
If you don’t make any changes to your payments, and more of your payments have been applied to interest rather than principal, your outstanding balance at renewal may be higher than originally anticipated. This means your payments may increase at renewal to get you back to your originally agreed upon repayment schedule (i.e., your amortization period).
Extending to a longer amortization period could be a valid option for some customers, however they would be subject to credit approval as part of the refinance. If you choose to make a change to your payment schedule at any time, it may also impact your payment amount.
"As we are in a higher rate environment, one option to help manage interest rate increases is by increasing the amount or frequency of your regular payments," Lee said.
"You can also make lump sum payments (conditions apply). When it comes time to renew, you'll need to choose between a fixed or variable rate mortgage term, and you'll need to decide which one works for your lifestyle and how comfortable you are with your interest rate changing during the term of your mortgage."
Fixed rate
With a fixed rate interest rate, you're protected from sudden and potentially significant increases in monthly mortgage payments if interest rates rise during the term.
"My advice for those currently with a fixed rate mortgage is to continue to monitor what's happening in the market," said Lee.
"While you may not feel the immediate impact of rates rising, you will likely be renewing in a different rate environment from when your term began, so understanding how the rates would impact your future budgeting, and planning accordingly, is important.
"And similar to customers in a variable rate product, you may also consider making lump sum payments over your term or increasing your payment to pay off your mortgage faster and make your payments more manageable at renewal when interest rates may be higher."
Know your options
As your financial needs grow and change over time, and the interest rate environment evolves, it's important to know all of the options that are available to you.
Be sure to find out if there are flexible payment options available that can help you prepare for the unexpected, such as the ability to pay down your mortgage faster, speed up or slow down payments, or even have the ability to make a lump sum payment without getting hit with prepayment charges. Book a meeting with your TD Mortgage Specialist to determine what the best approach is for you.
Questions? Book a meeting with your TD Mortgage Specialist to determine what the best approach is for you. Looking to renew? Here's (almost) everything you need to know about renewing a mortgage.