Evaluating your risk factors with rising interest rates
In these next series of posts, I am going to review what you need to know as a homeowner in this current climate of rising interest rates, and potentially lower home values.
1
Risk factors that BC homeowners should be aware of are,
Do you have a low mortgage interest rate due to the pandemic, and feeling comfortable and protective of your current mortgage. Some risk factors that you may want to watch for are accumulating credit card and debts that are not being paid off. Line of credit usage increasing and just paying the interest. The potential for falling home prices. Increasing spending because you have a low interest rate mortgage now and more disposable income.
The first risk factor is the one that will get most homeowners. They have a very low “pandemic rate”. Folks in this category have a fixed mortgage at a very low rate in the low 2% range or maybe even lower. They have about 2-3 years left on the term and are not watching or evaluating their current risk, as they enjoy this Low interest rate. This is really the calm before the storm. Some home owners are fine to proceed this way, others need to evaluate their risk factors and see if they need to react earlier than renewal.
The second risk factor is credit card and consumer debt. High interest rate debts that start to escalate to the point that you are in the “debt loop” and not able to pay them down. Often homeowners do not review their combined interest rate on all debts and realize that their income no longer supports the debts that they have.
Your third risk factor is a line of credit. These will fluctuate with each increase in prime and will eat away at cashflow. Paying only the interest on these debts and not attacking the principal is costly. There is also a risk to future loan qualification as this debt is included in your overall application and debt servicing ratios.
The fourth is falling home prices. As homes are projected to fall, waiting to react can cost you needed borrowing ability should you need to refinance. As home prices fall there is less equity in the home to use to refinance if that is required. Homeowners can get caught needing to refinance but not having enough equity in their homes to do so.
The fifth is consuming to a level that is not sustainable with future higher rates. Perhaps travel or the purchase a car because you have a lower monthly mortgage payment and not look to the future and higher payments. Knowing your debt servicing ratios and expecting higher mortgage rates is essential so that your overall financial health is not effected when your mortgage renews. Interest rates have experienced the highest rate increases in decades so it will be easy to get lost in the low rate romance and not be able to unwind debt obligations when your mortgage and other debt payments adjust to higher rates.
Call me to discuss your personal financial situation and review your risk factors. Your mortgage may be the solution.