The Relationship Between Interest Rates and Mortgage Payments

What's with all these interest rate hikes?

The Bank of Canada continued its campaign to bring high inflation under control on Wednesday, raising interest rates by 50 basis points in an effort to keep up with what they call "moderately stronger" economic growth.

This will mean more money for banks but less for borrowers who are looking at higher monthly mortgage payments as a result!

Interest rates are projected to gradually increase upwards, with appreciation in values reported around 6%. Think of it this way for every 1% increase in interest rate, buying power decreases by 10%.

In the eyes of a lender, you will want to take into consideration a borrower’s debt-to-income ratio — if rates increase and a loan amount increases, then a borrower may be at their upper limit for lender approval.

How do Interest Rates Affect Mortgage Payments?

As we all know, an increase in interest rates will result in an increase in your monthly mortgage payment. This is because when interest rates go up, so does the cost of borrowing money. The amount of money you have to pay each month on your mortgage is directly affected by the interest rate you're paying.

The reason why is pretty simple: let's say you're borrowing $100,000 at an annual interest rate of 5%.

That means that every year, you'll owe the bank $5,000 in interest payments. But if the interest rate goes up to 6%, you'll now owe the bank $6,000 in interest payments every year.

So, an increase in interest rates will always result in a higher monthly mortgage payment.

What about Loan Amounts??

In addition to interest rates, another factor that affects your monthly mortgage payment is the loan amount.

Obviously, the more money you borrow from the bank, the more money you'll have to pay back each month. But did you know that the size of your loan can also affect your interest rate??

That's right — the larger your loan amount, the higher your interest rate will be. This is because lenders see large loans as being riskier than small loans. And since they're taking on more risk by lending you a large sum of money, they charge a higher interest rate to offset that risk.

So not only will a larger loan amount result in a higher monthly payment, but it will also mean that you'll be paying a higher interest rate.

While some people may have an "if it ain't broke don't fix it" mentality when it comes to their mortgage, now might be a good time to consider refinancing into a lower rate. If your current interest rate is 4.5% and you're able to refinance into a 4% interest rate, that 1/2% decrease can save you big bucks over the life of your loan.?

On a $200,000 loan refinanced from 4.5% to 4%, your monthly mortgage payment would drop from $1,013.37 to $981.88 — a difference of $31.49 per month, or $766.28 annually! And over the entire 30-year term of the loan, you would save $22,988.40 in interest!?

Of course, there are many factors that go into whether or not refinancing makes sense for you as an individual borrower — things like how much equity you have in your home, what your credit score is currently, etc. But if you think refinancing might be right for you, now is certainly the time to start shopping around for the best deal.?

As you can see, both interest rates and loan amounts have a direct impact on your monthly mortgage payment. If you're thinking about buying a home or refinancing your current mortgage, it's important to keep these factors in mind.

With rising interest rates on the horizon, now is a good time to lock in a low rate while you still can!

And if you find the need for a real estate lawyer who is well-informed on new market trends, call Endhome for a free consultation.