Are you challenged? According to the November study of Canada’s 5.8 million residential mortgages by the Canadian Association of Accredited Mortgage Professionals, (CAAMP), 12 per cent of homeowners would feel the pinch if their mortgage rate rose by less than one per cent.
At the same time, 36 per cent of homeowners have been making heightened efforts to pay down their mortgage through increased monthly payments, lump sums, more frequent payments or a combination.
This is heartening news, but is it the best strategy? Probably yes if a mortgage is your only debt, but probably no if you owe money elsewhere.
The first step to finding the right course of action is to make a list of everything you owe, including principal, interest rate and the payments you typically make.
During the past year, the average rate for fixed rate mortgages according to CAAMP was 3.88 per cent.
Other borrowing can range from four per cent for home equity lines of credit (though obviously those with top credit rating will get better rates) to 29.99 per cent for some bank and retail credit cards.
Let’s suppose you’re one of the 36 per centers and are accelerating mortgage payments.
But let’s also suppose you have credit card and credit line debt of $25,000 with a combined (weighted) interest rate of 10 per cent (both roughly the Canadian average).
If your non-mortgage debt payments are $500 it will take you 300 months or 25 years to retire the debt and you’ll spend over $17,000 on interest along the way. Ouch!
However, if you just pay the required minimum on your (for now) cheap mortgage and accelerate payments on your other debt the picture looks better.
By increasing your credit line/credit card payments to $750 the debt vanishes in 40 months and interest costs decrease to $4,400.
At that point you can turn the entire consumer debt payment of $750 to your mortgage and it will begin to disappear very quickly.
Now that’s real protection from interest rate increases!
Don’t forget that personal and home equity lines of credit are just as vulnerable as mortgages to interest rate hikes.