Interest rates

Compare the impact of different interest rates on the cost of your mortgage

Homes for sale in Ajax, Ontario on September 7.Fred Lum/The Globe and Mail

The Bank of Canada raised its key interest rate by 0.75 percentage points on Wednesday and signaled that its aggressive campaign against inflation was not over. These rapid and successive increases in interest rates put pressure on the real estate market and on homeowners, who will soon be paying more interest on their mortgages.

As Canada’s prime rate rises — a benchmark rate that lenders adjust based on movements in the Bank of Canada‘s overnight rate — so will mortgage rates. For homebuyers, this means potentially higher monthly payments and increased overall interest on their mortgage. The effective date of these changes depends on the type of loan the borrower has taken out: fixed or variable.

The calculator below helps you compare the impact of different interest rates on the cost of your mortgage.

How do higher interest rates affect fixed rate mortgages?

A fixed rate mortgage usually locks in payments for a fixed term of two to five years. This means that fixed-term mortgage holders will see no change in the interest they pay on their mortgage until they renew their mortgage at the end of their current term.

If their mortgage term expires when the Canadian prime rate is higher than when they last signed a mortgage, they could start a new term at a potentially higher rate.

How do higher interest rates affect variable rate mortgages?

Some adjustable rate mortgages maintain regular payments, up to a certain threshold, called the trigger rate. With interest rates rising rapidly, some borrowers with variable rate mortgages are reaching their trigger rate, which means they will see their monthly payments increase along with the overall interest they pay on the principal of their mortgage.

Homeowners who stay below their trigger rate will maintain regular monthly payments, but a higher share of each payment will go to interest.

Mortgage capital is the amount you borrow from the bank.

The amortization period is the total term of the loan, which is often but not always 25 years.

With files by Mike Rendell. Carys Mills Interactive.

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