B.C. mortgage calculator: A simple way to examine interest rate ...

British Columbia mortgage holders have serious concerns about the effects of rising interest rates on their financial well-being, according to a poll from the Angus Reid Institute.

The poll found that a full quarter of B.C. mortgage holders had variable-rate mortgages. Thirty-two per cent also said they still had 20 years or more left on the term of their mortgage.

The Bank of Canada has already raised rates nine times since the start of 2022, which has driven mortgage lending rates correspondingly higher.

On Wednesday, July 12, the bank raised its benchmark interest rate by another 25 basis points, bringing it to levels not seen since 2001 amid fears the decline in inflation “could stall.”

The central bank’s key interest rate now stands at 5.0 per cent following back-to-back hikes.

Global News has put together three mortgage calculators that can help you calculate how much inflation will affect your mortgage, trigger rate and how often you should pay off your mortgage.

For more on whether buying a house is right for you, check out Global News’s Home School series which gives Canadians the basics they need to know about the housing market that they never learned in school.

Global News reached out to Vancity’s Senior Manager of Mortgage Services, Bradley Finerty,  to answer some questions about mortgages and what to do if a mortgage becomes unaffordable.

How much can someone borrow for a mortgage? And how does the financial institution determine what mortgage I can get?

The short answer is it depends on how much you can afford.

Credit unions and banks consider how much you can borrow against a property; it’s called the Loan-to-Value Ratio (LVR). For conventional mortgages (20 per cent or greater down payment) people can borrow up to 80 per cent of the value of the property. For high-ratio mortgages (less than 20 per cent down payment) an insurance provider is required (CMHC is the main mortgage insurer) and then up to 95 per cent can be borrowed if the property is under $500,000.

For properties between $500,000 to $1M, you can borrow up to 95 per cent on the first $500,000 and then 90 per cent on the remainder. If your property is more than $1M you will need at least 20 per cent down (see above). Here’s an example: If your property is $750,000, you would need a $50,000 down payment to be mortgaged for $700,000.

The other factor is how much can you afford to pay monthly on that borrowing, in other words, can you make your monthly mortgage payments? Financial Institutions look at what you will have to pay, including the mortgage, property taxes, strata if applicable, and services for the property and weigh that with other financial obligations, credit score, and your income. Lenders talk in terms of servicing your debt. In general terms, your mortgage and property costs should be no more than 40 per cent of your income.

Here is the simple math: If you make $100,000 a year you can service a mortgage debt of $40,000 a year, or “afford” about $3,300 a month. Keep in mind, that 40 per cent ratio will be impacted by any other debts you have, including credit cards, car payments or lines of credit, and your credit rating.

When should I take out a variable mortgage, fixed mortgage, or interest-only mortgage?

Unfortunately, there is no right answer to this question. It comes down to each person’s risk appetite.

Fixed: Keeps your mortgage payments and interest rate the same throughout the duration of the mortgage term. If market interest rates go up, your interest rate won’t. On the flip side, if interest rates fall, yours won’t.

Variable: Your mortgage payment, and interest rate, change depending on the prime rate set by the Bank of Canada – both up and down. If the prime rate changes your payment situation changes.

Interest-Only: Typically, interest-only borrowing is associated with Home Equity Lines of Credit (HELOC). HELOCs are used for borrowing against your property for such things as renovations, and some financial institutions will offer interest-only borrowing on construction on a property that then flips to a conventional mortgage once construction is complete.

Should I opt to pay off my mortgage weekly, rather than monthly?

Paying your mortgage with weekly, or bi-weekly payments results in additional payments each year – essentially paying off your mortgage faster. It also means you will pay less in interest. Bi-weekly payments (dividing your monthly payment in two) amount to two extra payments a year. This works well if your employment income is also paid bi-weekly.

What should I do if my mortgage becomes unaffordable?

At Vancity, we encourage our members to come talk to us if they are struggling to keep up with mortgage payments. There are options available, including extending the amortization (the number of years to pay off the mortgage) or looking at other mortgage products such as moving from a variable to a fixed, or generating income from a suite in the home to support the mortgage payments.

Is it a good idea to pay off my mortgage early?

Yes, it’s a good idea if it’s possible. Most financial institutions offer pre-payment options – ask about them when arranging your mortgage. Options include lump-sum payments annually (up to 20 per cent of your mortgage) or increasing your monthly payments.

But keep in mind other debts such as credit cards or a line of credit with a higher interest rate would be better paid off ahead of a lower-rate mortgage.

The best idea is to talk to a financial advisor, first, to better understand where to direct any “extra” money.

Could my age or employment situation affect my ability to get a mortgage?

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Mortgage lenders cannot discriminate based on age, but you do need to be 19 years of age in B.C. before you can enter into a mortgage contract. Employment is a significant factor when qualifying for a mortgage. A drop in income, for example from retirement, or a change to a job with a higher salary, would both affect a mortgage application.

What should determine whether I choose a short amortization period versus a long one (e.g., 35 years)?

The main reason people select a shorter amortization is to pay off the mortgage quicker. It will mean higher payments, but less paid in interest. Again, speak to your mortgage professional to make sure the amortization and payments match your financial goals – and needs.

What does a mortgage trigger point mean?

A mortgage trigger point or trigger rate is when the payments you are making on your mortgage loan are no longer covering the interest on the loan. At this point, lenders will adjust (that means increase) the monthly payment amount. Again, if approaching your trigger rate, talk to your mortgage professional to ensure you’re aware of all the options, such as increasing amortization to adjust the payment amount.

Should someone hire a mortgage broker to get the best deal for their mortgage?

A mortgage broker is an intermediary between those seeking a mortgage and the financial institutions that offer them. While a broker can access many institutions, which can potentially save you time from shopping around yourself, they don’t have access to all of them. Financial Institutions, such as Vancity, offer mortgage specialists who can support the application process. In any mortgage process make sure the mortgage specialist, or broker, is acting in your best interests to find you the mortgage that suits your needs.

What other homebuying costs should I expect to pay?

There are many. Here’s the shortlist: property transfer tax, legal fees, property adjustments (including taxes, water, or sewer bills), home insurance, and real estate agent costs, if selling a property.

What incentives are available for people seeking a mortgage, other than the first-time home buyers’ program?

Several financial institutions offer cash back when you close a mortgage with the institution (as an incentive, but also to cover mortgage financing costs). The financial incentive is based on the mortgage size (the higher the mortgage the more of a cash incentive) and the length of the term.

The Government of Canada recently announced the First Home Savings Account (FHSA) which allows first-time homebuyers to save for a home tax-free. The account allows an annual contribution limit of $8,000. This is different than the Home Buyers Plan (HBP) which allows you to withdraw from your RRSP to buy or build a qualifying home.

What are discount points and are they worth buying?

Some Financial Institutions offer discount points, usually through a broker, which lower your interest rate. You buy the discount points with an upfront fee. Typically, you can purchase these points to lower the rate by 0.25 per cent. Do the math to make sure you understand the break-even point of the transaction.

Anything else important to mention?

Plan ahead. Reach out to a mortgage provider before searching for a home. A pre-approval will give you security in a changing interest-rate market. It will also give you the best idea of what you can afford in terms of a mortgage and your monthly payments.

-with files from Craig Lord