The media does a great job at spinning stories to grab attention, and as a result attract viewers and which sells advertising space. One of their favourite topics, is interest rates… “rates are set to skyrocket”, “people won’t be able to afford their mortgages”, etc.
But what does it actually mean if rates double? Do you have visions of moving back in with your parents? Will you need to resort to eating ramen for dinner like you’re back in college? Or… is it no big deal and you’ll be just fine?
Let’s break this so-called “news” down and look at what it means in laments terms (i.e., dollars and cents) for people who hold a mortgage:
First off if interest rates were to double that doesn’t mean your mortgage payment doubles! For the below example, I’m using a 25-year amortization reflective of buyers who purchase with less than 20% down (meaning their mortgage is insured (i.e., CMHC).
Currently, in Canada, the average new mortgage balance is $400,000.
To qualify for a $400,000 mortgage, you need a down payment, great credit, and well documented income. At minimum, you will need $80,000 of gross income to qualify for $400,000.
| Mortgage | Rate | Amortization | Term | Payment | Balance at Renewal | |
| August 2021 | $400,000 | 2% | 25yr | 5yr Fixed | $1,694 | $335,081 |
| August 2026 (Renewal) | $335,081 | 4% | 20yr | 5yr Fixed | $2,025 | $274,337 |
Based on the exceedingly rigid stress test originally introduced in 2018 and enhanced again in June 2021, the maximum mortgage payment a household with $80,000 in gross income will qualify for today is approximately $1,700. But we don’t live in a world of gross pay (too bad eh!), so let’s dollarize this:
$80,000 is taxed at ~25.4%, leaving our borrower with $59,643 net, or $4,970 cash-in-hand each month. That $1,694 mortgage payment leaves our borrower with $3,276 to cover groceries, and other necessities. This means approximately one-third of net income is being used to service the mortgage payment.
Now back to the example above, by the time you go to renew it 2026, it’s likely that their income will have also increased. If they started out with $80,000 (gross) and received a 1% raise annually, they would now have a gross salary of over $84,000 which works out to an incremental $230/month in net income.
At renewal, with 20 years left on the mortgage, the 4% rate has increased the monthly payment to $2,025.00, that is an increase of $331.00/month. When we take into consideration the annual income increase, our homeowner is going to need to find an additional $101.00/month which isn’t a huge adjustment to other necessities – that’s about one meal dining out / month.
So, after all of that – the impact of rates doubling is not something to worry about, it’s a small impact and it doesn’t mean you are at risk of being able to pay for the roof over your head. The media is sensationalizing this “news” and causing unnecessary panic.
If the above example isn’t reflective of your mortgage, happy to walk through your situation and ease any concerns – just give me a call!