Could it possible that you are only paying the interest on your current mortgage?
Could it possible that you are only paying the interest on your current mortgage?
Variable rate mortgages are directly linked to the Bank of Canada's overnight rate… as the rates increase, the interest rate on variable rate mortgage also increases. If your mortgage payments are not adjusted to reflect the higher interest rate, your payments will go more towards paying interest, and less towards paying down the principal balance.
For example, if you have a $500,000 mortgage at a 3% interest rate with a 25-year amortization period, your monthly mortgage payments would be around $2,366. If the interest rate increases to 4%, your monthly payments will increase to $2,678. If your payment is not adjusted, in other words, if you keep paying the same amount, you will be paying more towards the interest, and less towards reducing the principal balance.
To avoid paying only interest on your mortgage, it's important adjust your payments accordingly when interest rates rise. This may mean increasing your monthly payments to ensure you are still paying down the principal balance.
Converting your variable rate mortgage to a fixed rate: This would provide you with more stability, making it easier to plan and budget as you will know exactly what your mortgage payments will be each month. It is important to note that converting to a fixed rate mortgage may come with certain costs and fees.
Refinance your mortgage: You could consider refinancing your mortgage to consolidate other debts at the same time and/or extend the amortization period. This would reduce your monthly mortgage payments, but increase the overall interest paid over the life of the mortgage.
When a variable rate mortgage is capped, it means that there is a limit to how high the interest rate can go during the term of the mortgage. The cap is a specified maximum interest rate that you will pay even if the Bank of Canada's overnight rate or the lender's prime rate increases beyond that level.
For example, let's say you have a variable rate mortgage with a cap of 5%. If the Bank of Canada's overnight rate increases and the lender's prime rate increases as well, causing the interest rate on your mortgage to rise to 6%, you would only be required to pay interest on your mortgage up to the capped rate of 5%.
Capping the interest rate on a variable rate mortgage can provide you with some protection against interest rate increases. However, it's important to note that the cap may come with a higher interest rate than an uncapped variable rate mortgage, and may also come with additional fees or restrictions.
Some capped mortgages may include provisions that allow the lender to add the excess interest to the mortgage balance, while others may require you to pay the excess interest as a lump sum at a later date.
If you find yourself with a variable rate mortgage, and you are not sure what to do. Call or email us, and we will be happy to explain and explore the different options offered to you.
Fred and Martin