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How to Cope with Rising Mortgage Rates

How to Cope with Rising Mortgage Rates
By Madhavi Acharya-Tom Yew
www.moneyville.ca

Royal Bank of Canada and Bank of Montreal raised the interest rates on their five-year closed variable mortgages, effective Wednesday.

RBC increased the special offer rate on its five-year variable mortgage to 2.55 per cent from 2.35 per cent, a change that adds $2,280 in interest costs over a five-year term, on a $400,000 mortgage. Its variable posted rate went up by one-fifth of a percentage point to 3 per cent.

At BMO, rates on five-year variable mortgages went up by 0.15 per cent to 3 per cent.

The changes will affect mortgage renewals or new clients, but signal a big shift by Canada’s big banks: they are changing their rates even though the Bank of Canada isn’t. It's quite possible that rates will move up again. Lenders say their borrowing costs are increasing, and they're hiking their interest rates as a result.

Variable rates have been so low for so long, they are becoming less profitable for the banks. Should you lock-in?

That depends on your financial situation. Alyssa Richard, founder of RateHub.ca   adding that other lenders could follow suit.

“If you’re shopping for a mortgage and leaning towards variable, you want to lock in sooner rather than too late," she says.

 This change came as a surprise to RateSupermarket, whose  expert panel expected fixed mortgage rates to fall  and variable rate terms to remain unchanged. 

Variable rates are typically influenced by the Bank of Canada overnight lending rate. Kelvin Mangaroo, founder of RateSupermarket.ca says that since there has been no change to this rate, the increase comes as a surprise. He says lenders are trying to encourage consumers to opt for a fixed term.  

While some banks have increased their posted variable rates, other specialty lenders, credit unions and mortgage brokers will still be able to offer rates as low as 2.05 per cent, Mangaroo said. 

 Other advice he offers for consumers:

 - Compare the market before signing your mortgage contract. Don't just speak with your own bank, take a look at what else is out there.

- If you have reviewed your risk profile and are comfortable with a variable rate mortgage, don't let this increase sway you. Variable rates are still incredibly low and are expected to remain low in the coming weeks.

- Pay down your mortgage. Although rates are low now, they will eventually go up. Take advantage of this low interest rate environment by increasing your monthly mortgage payments, doubling up on payments or make a lump sum contribution.