By the Numbers

Here we are in a brand new year, and hopefully the economy, among other things, will turn around in our favour. I did a little digging into the repercussions of rising interest rates and was stunned with my findings.

First off, let me explain, I am not a mortgage specialist or financial advisor, so the numbers and options mentioned are not to be acted upon. They are merely for your interest.

The recent interest rate hike puts us at 4.25%. Last year at this time, we were at .25%. It does not sound like much of a difference, but it is a 1700% increase. The reason for the interest rate hike is, to stop people from spending, which will lead to a decrease in inflation. Yes, it is working, but what does this hike in interest rates mean to the average homeowner?

Clearly, people who owe money are the ones impacted the most, especially those who are looking to purchase a home. Let us look at a scenario of a house, with a value of 1 million dollars, which as high as it may sound, is no longer unrealistic. The average down payment tends to be 20%, or in this model, $200,000.

I recently read it would take about 20 years for a couple to save $200,000. Many are able to go to the bank of mom and dad, and others seek loans elsewhere.

Let us look at the $800,000 mortgage in our storyline. Mortgages are usually amortized over 25 or 30 years, so we will use 25 for this scenario. A year ago the interest rate for a 5 year, fixed rate mortgage was 1.4%. Today that same mortgage rate is 6.5%. To many of us, that rate does not seem high. Those of you old enough, may remember 18% mortgages in the eighties.

If you purchased our million dollar home a year ago, your payment would be $3161 a month. Although it is an acceptable amount, you need about $100,000 a year of household income to be able to afford the payment, and enjoy your life. That same mortgage, at 6%, will require a monthly payment of $5359.

Breaking down last year's payment of $3161, about a third ($931) went to interest and the remainder to your principal. At today’s rate, with a payment of $5359, the interest jumps to $4276 (about 75% of which is interest).

Fortunately, banks are giving people a break, by keeping payments the same. Their kindness however, ends there, as many people are now paying only interest on their loans.

So, why are we in this situation? The government predicted inflation, which was a result of COVID, would end once the pandemic was over. Big mistake. Yes, inflation is starting to slow down, but it is certainly not going to drop from 6% to 2% in a mere 12 months.

People who have variable interest rates are already feeling the effects. Those with five year fixed rates, depending on when they renew, will probably be in for a shock. Fortunately, many of those buyers have seen an increase in the value of their properties, which will help at renewal time.

It is not all doom and gloom. Depending how far you are into your mortgage, you can simply re-amortize your debt over a longer period of time. Yes, it means you will be paying longer, but at least you will keep your property. For those who remember the early nineties, people were not as fortunate, and many had to leave their homes.

There are various ways around these problems, such as using investments, which are not making much money, to pay down mortgages. This is an area where you need to talk to your financial advisor, mortgage specialists or the banks. I think the key is to be very aware of your personal situation, and talk with experts immediately, to formulate a plan which will work for you.

As I mentioned at the outset, I am not a specialist in the financial area, and the figures quoted are strictly from my findings through research. The message is, things are changing, and to stay ahead of the game, talk to people who are in the know.