Managing your mortgage in today’s era of slowly rising rates can be a tricky situation.
After roughly a decade of historically-low interest rates, the Bank of Canada began raising its key lending rate last year, and most recently hiked its rate to 1.5 per cent on July 11. The result has been much hand-wringing on the part of Canadian homeowners, with Moody’s Investor Services estimating that half of Canadian mortgages will be up for renewal in 2018 and 2019.
Dealing with the unpredictable, however, doesn’t mean you need to panic, says Jeff Spencer, Vice President, Retail Sales and Distribution for Manulife Canada. The first thing homeowners should do, he says, is understand the role their mortgage should play in finances.
“A mortgage is a savings vehicle,” Mr. Spencer explains. It allows homeowners to build equity as they pay down their mortgage. It’s also a debt — likely the biggest one most Canadians will have. It can be tempting to recoil at the idea of rising rates adding to that debt, but homeowners should understand how rate changes will actually affect their whole financial picture — payments, income, expenses and taxes.
The second step is to consider which solution fits the homeowner’s situation and comfort level.
One strategy is to “ladder” your mortgage, apportioning your debt to different terms to create less rate volatility, Mr. Spencer says. It would mean setting up a series of different fixed terms maturing at different times and at different rates.
“It’s similar to what a good advisor does with GICs,” Mr. Spencer says. “You set up a structure for who you are as an individual. If you split your mortgage up into five pieces, for example, only one portion of your mortgage is renewing at one time. It helps reduce sticker shock when rates do go up.”
Manulife One, is designed to allow mortgage holders to easily reduce their interest costs and become debt free sooner. It can be done in a more complex way as mentioned above or by simply managing your debt in just the main account. The key point being the product can be tailored to the needs of the customer.
Participants consolidate all their assets, income and liabilities into one account, which includes the mortgage. Money coming into the account goes straight to paying down debt, including the mortgage principal.
The plan is a great option, Mr. Spencer says, because it’s designed so that participants who use its features wisely can save substantial interest costs over time, even if rates go up.
There are also some more practical tips that can help homeowners better prepare for rising rates.
Sami El-Farram, a mortgage broker at Total Mortgage Source 360 in St. Catharines, Ontario, says it’s important to keep track of the actual details of your mortgage, including when exactly your mortgage renews.
“Start shopping four months in advance,” Mr. El-Farram advises. “Most lenders will hold your rate for up to 120 days.”
James Robinson, a mortgage agent with Dominion Lending Centres Mortgage Watch in Toronto, also suggests a switch to a variable rate mortgage instead of a fixed rate, as they typically carry lower rates and therefore, lower payments.
Ultimately, no strategy can replace being informed and knowing the best options for you, Mr. Spencer at Manulife adds.
“In 2018 and 2019, 50 per cent of mortgage holders in Canada will renew. Yet many don’t negotiate their rate and most don’t know how to talk about managing debt,” he says.
“The key is to plan ahead.”
Advertising feature produced by Globe Content Studio. The Globe’s editorial department was not involved.