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The Effects of Interest Rate Increases

The Effects of Interest Rate IncreasesPhoto from Unsplash

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The Bank of Canada has raised its benchmark interest rate 9 times in the past 12 months, hiking the cost of borrowing for Canadians, especially those who own their home. As a result, Canadians are increasingly vulnerable to “payment shock” as higher household debt levels collide with oversized interest rate hikes.

Growing Debt in Canada

It’s a situation experts say could push some to a breaking point, as they already rely on higher interest rate loans and credit cards to pay for the soaring cost of everyday essentials. Given growing debt levels and escalating interest rates, we can expect to see more people struggle to make minimum debt servicing payments in the coming months.

What Does a Mortgage Rate Increase Mean in Real Terms?

If you have a five-year mortgage of $350,000 with a fixed rate of 3.59% and an amortization period of 25 years, for example, you will pay $1,769 in repayments each month for five years.

However, a five-year mortgage of $350,000 with a fixed rate of 4.59% and an amortization period of 25 years increases your monthly repayments to $1,963. Using the same figures, an increase to a fixed interest rate of 5.59%, pushes your monthly repayments up to $2,168.

As you can see, a 1% rise in interest rates means you’ll need to find an extra $194 a month to pay your mortgage, while a rise of 2% means you would need to find an extra $399 every month simply to keep up with your mortgage repayments.

If you’d struggle to find an extra $200 or $400 every month, it’s easy to see why so many people get into debt problems when mortgage rates rise. In fact, statistically speaking, a substantial number of people who file for insolvency do so because of mortgage rate increases.

What Happens When You Fall Behind?

Many people overlook the effects of mortgage rate increase on debt payments, but this can have a catastrophic impact on their finances. If you are unable to cope with the added expense when interest rates rise, you could fall into debt problems. So how can this affect you and your home?

First, you’ll be charged a late fee if you haven’t paid your mortgage within 15 days of the due date. Usually your loan will then officially go into default if you’re still unable to make your payment after 30 days.

The next step is foreclosure. The process can start when you’re more than 120 days past due. This is when the lender takes possession of the home and removes you from the property. The actual legal process for this varies by province however, the end result is the same: the lender sells the property and uses the proceeds to pay off your remaining mortgage balance.

Where to Find The Right Professional Help in BC

Don’t despair if you cannot reach an agreement with your lender and are forced to sell your home, because help is available. You can start by enlisting a team of professionals to guide you to get back on track and to help you handle the complicated situation in the best and stress-free way possible.

One such professional can be in the form of an all-inclusive real estate agency. This type of real estate agency not only can help you find a new home, but also to assist you during the packing process, finding storage for your belongings, the renovations that may be needed in your new home, and of course, the moving part. An example of this type of agency in the Vancouver and Lower Mainland area is Team Kleiner, REALTORS®.

Why Team Kleiner?

Selling a home is already one of the most stressful experiences in a person’s life. When you are forced to sell because you can no longer afford to pay your mortgage due to interest rates increases, it may feel even more so.

Team Kleiner understands this struggle and wants to be there to support their clients every step of the way. You can count on Team Kleiner’s two experienced real estate advisors to make it as stress-free for you as possible by keeping track of the whole process and by keeping everyone involved accountable.

Working with Team Kleiner is unlike working with other realtors where the business relationship abruptly ends once the job is done. With Team Kleiner, not only can you benefit from all the added services such as free move to make the transition to your new home stress-free, but also a highly professional team who genuinely care to help you through what may be a particularly difficult period in your life.

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