# Mortgage rates on the rise...?



## Harp (Jul 18, 2012)

Hearing that rates may be on the rise :upset:

Currently have approx $165K owing on mtge, @ 3.69%, not up for renewal until another 1.5 yrs.

Thanks to my "wonderful" parents who taught me nothing about finances, mortgages, etc I have had to learn on the fly. Right now, I am trying to figure out if breaking and locking in for a 5 yr is worth it or not....

My wife has around 18K owing on LOC that we used for reno's that we would like to throw onto the mtge when we renew or break and re-finance. Just not sure what to do. When we got our mtge we used a mtge broker, not sure if that was a good idea or not.

Just wondering what you fine folks would do...thanks


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## Xoron (Jun 22, 2010)

I'd ride it out.

When we got our first mortgage, we locked in for 5 years at 4.4% (2005). After that expired, we've been doing 1 year renewals (basically getting the best rate we can every year). Our last renewal was for 2.82%. If you can deal with volitilty, 1 year renewals will give you the best % of any fixed rate mortgage. The only reason we didn't do variable, is that the shortest term offered was 5 years. I didn't want to have my hands tied like that for 5 years. 

The 1 year fixed has worked out pretty well for us. The only two things are:
1. Interest Rate Risk - that the rates will rise quickly, making the 5 year option better in the long run (unlikely)
2. The Pain in the Butt of having to go into the branch every year to negotiate the rate and sign the paperwork. 

My recommendation: take the 1 year fixed (with the lower % and monthly payment) and make payments like it was the 5 year rate. For example if the mortgage payment on the 1 year is $900/month, and the payment on a 5 year is $1100 a month, make the $1100 payment on the 1 year. You'll be so much farther ahead in 5 years time.


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## birdman (Feb 12, 2013)

There is no way to know for sure what is going to happen to rates but a few things to consider:
1. Take a look at the yield curve which is the difference in rates between demand and say 5yrs.
2. While rates have gone up recently, they are still quite low from a historical perspective and we may well be at the low end of the cycle.
3. I believe that normally one does better by staying short on the curve.
4. Can you afford the risk if rates go up significantly? In the past I have seen borrowers rates go from around 12% to 17%!! I'm not suggesting this is about to occur but the thought is scary.
5. Consider hedging your bets by asking your lender to place some on floating rate, some for 3 yrs, and some for 5 yrs. Make your own decision regarding the terms but essentially you have one mortgage (a mortgage is the security) but 3 loans.
6. Of my 2 grown children, 1 locked in for 5 years about 6 mos ago and the other split between floating and 5 yrs, also about 6 mos ago.
7. I would not be investing in 5 yr term deposits right now so would this suggest the 5 yr term? Who knows?

Sorry I will not give you a specific recommendation and what I would do may not be good for yourself. Good luck.


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## Just a Guy (Mar 27, 2012)

Generally speaking, it's not worth breaking a mortgage for less than a 1% difference as the penalties can eat up any savings. 

While I think interest rates will rise, they can't rise quickly without setting off a real estate meltdown. 

All this being said, no one should be complaining about an interest rate below 5%.


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## MorningCoffee (May 8, 2013)

Have you looked into a rate blend and extend? That would mean your lender would lower your rate and extend for another 5 years without breaking the mortgage (thus no fees). The rate is usually somewhere between what you are currently paying and their current rate...


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## james4beach (Nov 15, 2012)

By the way, to reduce some of the mystery of why/when banks raise mortgage lending rates ... look at charts of the government of canada bonds. Particularly important are the 5 year Government bond and 10 year government bond yield.

This is the basis for the fixed mortgage rates. Bond yields (interest rates) started rising back in May and banks reflected those rates with a time delay. The higher rates, originating in the bond market, slowly trickled through both to higher mortgage rates and higher GIC deposit rates.


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## none (Jan 15, 2013)

Harp said:


> Thanks to my "wonderful" parents who taught me nothing about finances, mortgages, etc I have had to learn on the fly. Right now, I am trying to figure out if breaking and locking in for a 5 yr is worth it or not....


Sweet jesus........ Did your parents at least teach you how to read? Take some personal responsibility.


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## Cal (Jun 17, 2009)

Aside from the bond markets as an indicator.....mortgage rates have been at historical lows, so even if they go up a bit, statsitically you are still getting a low rate.


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## sags (May 15, 2010)

With so many home buyers, purchasing the most house they could qualify for at 2-3%, how much financial distress would a 33, 66, or 100% increase in their payments cause them?

When we had mortgages at 8 to 12%.........a 1% increase was manageable.

With a mortgage rate of 3%...........a 2% increase would have been untenable.


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## blin10 (Jun 27, 2011)

sags said:


> *With so many home buyers, purchasing the most house they could qualify for at 2-3%, how much financial distress would a 33, 66, or 100% increase in their payments cause them?*
> .


90% of people will downsize other stuff first (cars, cloths, vocations, etc) before "not being able to afford home".... banks do not give up mortgages to people who will default if rates increase few %


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## My Own Advisor (Sep 24, 2012)

Agreed, not worth it if less than 1% difference.

Ride it out and if possible during the ride, increase lump sum payments. This way, you have less principal to worry about come renewal (when rates are higher).


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## james4beach (Nov 15, 2012)

I think you really have to look at % change in the mortgage interest rate.

For instance an increase from 2.8% to 3.5% doesn't look like much in nominal terms but it's a +25% increase. Think of it in cashflow terms ... this rate increase means a 25% increase in the debt servicing cashflow and it's CASHFLOW that really matters.

Considering how many people I know who basically live paycheck to paycheck, even with their high incomes, I think the rise in interest rates that's happening now could be very significant. Many people don't have an extra 25% (for example) cashflow available. It's a big deal.


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## Harp (Jul 18, 2012)

none said:


> Sweet jesus........ Did your parents at least teach you how to read? Take some personal responsibility.


that's awesome! I love starting my day with comments like that! I never get tired of minimum wage humor.


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## andrewf (Mar 1, 2010)

james, I think you're right that it's the % rise in mortgage payments that matters, not absolute change in rates. When rates are low small changes in rate can make relatively large changes in payments.


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## Davage (Nov 14, 2012)

Yes. The % rise in interest rates is really quite extreme. Back in the 80's when interest rates went from 12% to 18%, that multiplied the amount of interest being paid by 1.5. A 3% mortgage rate going to 4.5% has a similar effect.

Far too many people right now are in houses that they cannot afford, and these interest rate hikes, even though they seem small, could be the breaking point for many. On "The National" last week I saw a story about a woman who was out house shopping, because she wanted to get into a house before the rates increase, otherwise she wouldn't be able to afford a house. Just wait until it comes time for her to renew the mortgage in 5 years time.


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## Four Pillars (Apr 5, 2009)

james4beach said:


> I think you really have to look at % change in the mortgage interest rate.
> 
> For instance an increase from 2.8% to 3.5% doesn't look like much in nominal terms but it's a +25% increase. Think of it in cashflow terms ... this rate increase means a 25% increase in the debt servicing cashflow and it's CASHFLOW that really matters.
> 
> Considering how many people I know who basically live paycheck to paycheck, even with their high incomes, I think the rise in interest rates that's happening now could be very significant. Many people don't have an extra 25% (for example) cashflow available. It's a big deal.


I agree with your interest rate increase comment, but I disagree that people don't have the cashflow available. 

Living paycheck to paycheck doesn't necessarily mean there is no capacity to increase cashflow. It just means they spend all their money. If someone is spending all their income on food & shelter and is just getting by, then they are in a lot of trouble if their basic costs increase (such as their mortgage payment). 

Someone who blows a lot of money on discretionary items should be able to handle a large increase in mortgage costs because they can easily cut back on their extra (wasteful?) spending.

Elizabeth Warren wrote a book about people who run into financial problems where she discusses that folks who over-extend themselves on houses to get into good school districts are taking on more financial risk then someone who has lower housing costs, but spends a lot of money on tvs and vacations

http://www.moneysmartsblog.com/the-two-income-trap-book-review/


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## Homerhomer (Oct 18, 2010)

james4beach said:


> I think you really have to look at % change in the mortgage interest rate.
> 
> For instance an increase from 2.8% to 3.5% doesn't look like much in nominal terms but it's a +25% increase. Think of it in cashflow terms ... this rate increase means a 25% increase in the debt servicing cashflow and it's CASHFLOW that really matters.
> 
> Considering how many people I know who basically live paycheck to paycheck, even with their high incomes, I think the rise in interest rates that's happening now could be very significant. Many people don't have an extra 25% (for example) cashflow available. It's a big deal.


On the $750K mortgage (25 year term), the increase from 2.8 to 3.5 would mean the payments increase monthly by $271 from $3472 to $3744 or 8%, not a significant change IMO. With 25% increase in rates the actual payments go up by about 8%, anyone with half a brain should be able to handle it unless there are other changes in their household (primarly lost income).


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## andrewf (Mar 1, 2010)

If 2.8% to 3.5% is the extent of the rise.


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## Homerhomer (Oct 18, 2010)

andrewf said:


> If 2.8% to 3.5% is the extent of the rise.


Yes, if it goes higher than we will see huge impact, if it gets to be 5% instead of 2.8% than on the above sample the payments will increase by about $900 or 25%, that is pretty significant and some unfortunately will not be able to handle it.
Than again you would hope that for anyone to have $750K mortgage they would have at least $250K annual household income, hence the net would be in the $12K range per month, increase of less than $1000K in mortgage payments should be easy to absorb, however with how the mortgages were given out left right and center and I am pretty sure they are folks making much less than that who for whatever reason have qualified for ridiculous mortgages.


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## andrewf (Mar 1, 2010)

And it doesn't take a huge % of borrowers to default to cause trouble in financial and RE markets. It's always the marginal buyers/sellers that set prices.


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