Interest on mortgages
The Financial Consumer Agency of Canada (FCAC) has expectations for federally regulated financial institutions. FCAC expects them to help you if you're struggling to pay your mortgage due to exceptional circumstances.
Text version: Figure 1
|Monthly payment amount
|Interest cost over 5 years
|Interest cost over 25 years
Make sure your home is within your budget. Consider if you’re comfortable with the possibility of interest rates increasing. Determine if your budget could handle higher payments. If not, you may be overextending yourself.
How your credit rating affects your interest rate
Lenders look at your credit report and credit score to decide if they will lend you money. They also use them to determine how much interest they will charge you to borrow money.
If you have no credit history or a poor credit history, it could be harder for you to get a mortgage. If you have good credit history, you may be able to get a lower interest rate on your mortgage. This can save you a lot of money over time.
Fixed interest rate mortgage
Fixed interest rates stay the same for your entire term. They are usually higher than variable interest rates.
A fixed interest rate mortgage may be better for you if you want to:
- keep your payments the same over the term of your mortgage
- know in advance how much principal you’ll pay by the end of your term
- keep your interest rate the same because you think market interest rates will go up
Variable interest rate mortgage
A variable interest rate mortgage with fixed payments may be riskier than you expect. When interest rates rise, more of each payment automatically goes toward interest costs.
You could end up in a situation where none of your payment goes toward paying down the principal. Instead of paying down your mortgage, the total amount you owe on your mortgage will increase. You may have to contribute more capital to avoid problems renewing your mortgage. Acting early is important to prevent the situation from getting worse.
If you have a variable interest rate mortgage with fixed payments, contact your financial institution as soon as possible to discuss your options.
A variable interest rate can increase and decrease during your term. If you choose a variable interest rate, your rate may be lower than if you selected a fixed rate.
The rise and fall of interest rates are difficult to predict. Consider how much of an increase in mortgage payments you’d be able to afford if interest rates rise. Note that between 2005 and 2015, interest rates varied from 0.5% to 4.75%.
Consider if you’re comfortable with the possibility of interest rates increasing. Determine if your budget could handle higher payments. If not, a fixed interest rate mortgage may be better for you. You may also consider fixed payments with a variable interest rate.
A variable interest rate mortgage may be better for you if you’re comfortable with:
- your interest rate changing
- your mortgage payments potentially changing
- the need to follow interest rates closely if your mortgage has a convertibility option
Get information on current interest rates from the Bank of Canada or your lender’s website.
Fixed payments with a variable interest rate
If the interest rate goes up, more of your payment goes towards the interest, and less to the principal.
If the interest rate goes down, more of your payment goes towards to the principal. This means, you pay off your mortgage faster.
If the market interest rates increase to a certain percentage or trigger point, your lender may increase your payments. This payment increase will make sure that you pay off your mortgage by the end of the amortization period. The trigger point is listed in your mortgage contract.
Adjustable payments with a variable interest rate
With adjustable payments, the amount of your payment changes if the interest rate changes. A set amount of each payment applies to the principal. The interest portion changes as the interest rates change. You’ll know in advance how much of the principal you’ll have paid at the end of the term.
What you can do to protect yourself if interest rates rise
If the interest rate rises, your payments increase. Make sure that you can adjust your budget in case your payments increase.
Ask your lender if they offer:
- an interest rate cap: a maximum interest rate your lender can charge on a mortgage. You never have to pay more in interest than the maximum cap, even if the interest rates rise
- a convertibility feature: where, at any time during your term, you can convert or change your mortgage to a fixed interest rate
Note that if you choose a convertibility feature and change your mortgage to a fixed interest rate:
- you usually have to pay a fee
- certain conditions may apply
- your new fixed interest rate may be higher than the variable interest rate you've been paying
Hybrid or combination mortgages
You could choose to opt for a hybrid or combination mortgage. In these mortgages, part of your interest rate is fixed and the other is variable.
The fixed portion gives you partial protection in case interest rates go up. The variable portion provides partial benefits if rates fall.
Each portion may have different terms. This means hybrid mortgages may be harder to transfer to another lender.
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