An increase of $125 each month means either changing your spending habits, finding additional income, or increasing your reliance on credit cards, overdrafts, or other forms of credit to supplement your lifestyle. In addition, a sustained payment increase of more than $150 per month, without a decrease in expenses or added income, could mean relying on the HELOC to make credit card payments, resulting in a higher HELOC balance.
How to Prepare for Higher HELOC & Variable Rate Mortgage Payments
The Effect of Interest Rate Hikes on Variable Rate Mortgages
When it comes to variable rate mortgages, while payments are based on Prime, e.g. Prime minus 0.55% for example, actual payments are set at a higher rate and often closer to the qualifying rate. This protects borrowers from frequent changes to their payment amount.
When the interest rate for a variable rate mortgage changes, the portion of your payment that goes towards the principal decreases and the portion allocated for interest increases. HELOC payments are determined differently – they are typically set at “interest only” and paying down the principal amount is up to you.
Unless your lender has deliberately lowered your variable rate mortgage payment to its lowest possible amount, your actual payment amount does not change with every interest rate announcement from the Bank of Canada.
An extremely low payment can get you by during a difficult time, but leaving it set at its lowest point can be stressful. Knowing that your payment could change at any time is also a budgeting nightmare when you’re trying to manage through difficult times.
Payment Examples for a Variable Rate Mortgage
Consider this example for a $550,000 mortgage. A buyer would qualify for the variable rate mortgage at a monthly payment of $3,354. After the mortgage is funded, to create some breathing room in their budget and depending on their situation, this borrower’s payment could be lowered by about $300 to $3,026. However, if Prime goes up at all, their payment would increase accordingly.
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