Worried About Your Variable Rate Mortgage Payments Going Up?
How to Prepare for Higher Home Equity Line of Credit (HELOC) Payments
By Julie Jaggernath
If you have a variable rate mortgage or a home equity line of credit (HELOC), it’s likely that you’ll face higher interest rates and payments sooner than expected. This will be due to the Bank of Canada raising the rate on which banks and credit unions set their Prime lending rate. While the interest on a fixed rate mortgage won’t change until renewal time, those rates have seen some small increases too. We can help you gain the upper hand on your finances, before your payments go up and add stress to the already increasing cost of living.
The Effect of Higher Variable Rates on Credit Card Payments
We all know that we only have so much money available each month to make our credit card payments. While credit cards tend to have high, fixed interest rates which do not change when variable rates change, if you use your HELOC to make your credit card payments, it’s easier to make a dent in your debt load when rates are low.
If you’re like many Canadians, you’ve used your HELOC or have refinanced your mortgage to consolidate debt to take advantage of a lower interest rate. But any headway you make with paying down non-mortgage debt, like credit cards, when rates are low evaporates when rates go up. Then you’re suddenly required to make higher payments on your mortgage or HELOC.
Those who have used a HELOC to manage credit card payments and other bills on a routine basis could be hit the hardest because of their reliance on their line of credit. It’s almost as if it’s become an extension of their pay cheque.
If this is how your household is able to make ends meet, contact us sooner than later for help. A credit counsellor will review your budget with you to see what other options you have. When interest rates rise, it could force your payments up by several hundred dollars a month. You need a plan for how to manage that because defaulting on a debt tied to your home will have far-reaching implications.
Will Interest Rates Ever Really Go Up?
If you’re scoffing at the thought of interest rates going up and higher payments actually materializing, you’re not alone. Warnings in the past haven’t led to the significant rate increases that were predicted. But thinking that the future will be the same as the past is a fatal flaw in how many people manage their finances.
You might feel a certain degree of comfort that you won’t face trouble making your mortgage or HELOC payments because you qualified for the loans with the stress test criteria, or even under specific mortgage rules. Qualifying at a higher interest rate, but then paying a lesser amount, may have lulled you into believing that you could still afford higher payments if or when they happen. However, affording a higher amount becomes a more remote possibility once property taxes, strata fees, insurance, utilities, maintenance, and renovations take over any extra room you had in your housing budget.
The Best Tips for How to Prepare for Higher Payments
So, the big question remains – what can you do NOW to prepare for the higher payments? One of the best tips for homeowners is to use the much-maligned stress test to your advantage. Calculate the difference between your current mortgage or HELOC payment and what the payment would be at the higher, stress-test rate.
As of June 2021, the stress test interest rate rose to 5.25%. If you qualified for your mortgage in the last few years, calculate your higher payment at the previous stress test interest rate, which was 4.79%. If you’re not sure at which rate you were qualified, add at least 2.5% to your current interest rate.
For example, with a $550,000 mortgage amortized over 25 years:
Current monthly mortgage payment at 2%: $2,328.98
Monthly mortgage payment at stress test rate 5.25%: $3,277.55
Additional monthly amount that would be due: $948.57
Set the difference – the $948.57 – aside in a separate savings account. This way you can help yourself get ready for higher payments. It gives you a chance to adjust your lifestyle spending to a tighter budget while you remain in control of your situation. The money that accumulates in savings will be there as a cushion to help you navigate through future uncertainties. It really is a win-win all around, especially if you discover that a tighter budget isn’t a realistic option for your household.
The Danger of Using a HELOC for Debt Consolidation
Using a HELOC for debt consolidation is often not a smart strategy. The low interest rates on home equity lines of credit means that many people use them to pay off their high interest credit cards each month. However, due to the revolving nature of a line of credit and no end date for paying off what you owe, it can easily turn into the never-never plan.
Whether you use a line of credit that is secured by your home or not to consolidate debt, it’s important to use a rock-solid budget to keep on top of your payments. Otherwise, without serious discipline to not use the line of credit for any other purpose until you’ve paid it off in full, this debt consolidation strategy could turn into one of your worst financial decisions.
Options and Solutions When Making Higher Payments Isn’t Possible
If higher mortgage and HELOC payments are a struggle, we are available to help. Our credit counsellors are experts at helping Canadians consider their options around managing their money and debt better.
Our counsellors will provide you with information and guidance around:
- Creating a realistic household budget that allows for every family member’s spending
- Assessing options to deal with debts and bills
- Understanding the long-term implications various debt relief options have on your credit rating
- Learning money skills to ensure that you will have a more stable financial future
They will offer you a Debt Management Program if it’s a viable option for you or refer you to where you can get the help you need. This time it is very unlikely that we’ll escape interest rate increases. Heed the warnings, even if interest rate increases are slow to materialize in this post-pandemic landscape.
Contact Us for Help Making Your HELOC and Mortgage Payments
If you think you might need help, you likely do, so don’t delay. The longer you wait, the less time there is to take advantage of the low interest rate climate which makes it easier to deal with debt. It can also be the right time to find out about switching from a variable to a fixed rate mortgage. Appointments with our credit counsellors are free, confidential, and can be conducted over the phone. They will answer your questions and provide you with unbiased, judgement-free information. With proactive steps now you’ll be ready for whatever happens with your mortgage, HELOC, loan, and credit card debts and can look forward to a more stable financial future.