While several items in Canada remain to have low interest rates, one sector is on the rise. Homeowners can expect to see a rise in mortgage interest rates later in 2013. For quite some time, interest rates were staying right around 2.99% for qualified home buyers. In recent studies, it is shown that the average interest rate on a home mortgage is now 3.5%, and in some cases, even higher. Playing a factor in the increase is the Canadian federal government’s changes to amortization rules. The maximum term used to be 30 years or up to 35, which kept payments and interest rates low. Over the last 12 months, the amortization period was reduced to a maximum of 25 years. This increases monthly payments and gives banks the opportunity to raise interest rates slightly.
Why are Interest Rates in Canada Rising?
The main reason for the slow rise in interest rates is government regulation. Another culprit is the Government of Canada bond dropping in value. The value is estimated at 1.2% in early 2013. With this value being so low, the government has to find another way to take in revenue. The solution, at least short term, is to increase mortgage interest rates slightly. Even the one-half percent raise in rates is going to add up to a healthy sum of money.
In addition to these factors, the rise and fall of regulatory and treasury yields also plays a role. Although the numbers have remained favourable, the residual numbers have been unstable. Bond yields did rise slightly in early 2013 with most consumers cashing in those bonds for personal use instead of re-investing those funds.
What Should Canadians Expect over the Next 12 Months?
Over the next 12 months, it is projected that the interest rates on home mortgages will plateau at 3.5%. It is not estimated that they will rise higher, but some experts do say that a temporary spike to 5% is a small possibility. Experts do suggest to homeowners to budget for the increases even if they do not take place right away. The warning given about the rate hike is to give homeowners time to re-situate their budgets and ensure that enough funds to pay or their homes is secured.
Why Canada has had Such Low Interest Rates Previously
Canada has had such low interest rates for so long simply because the government needed to find a way that made sense to do so. Many western countries face the same issue here. The Canadian government also wanted to prevent itself from falling victim to the European and United States debt crisis. The interest rates on nearly anything possible were pushed as low as they could go. Now, this puts the financial burden on Canada with less revenues coming in from interest and taxes. To rectify this, slowly increasing interest rates on things such as mortgages, auto loans and other private loan types will take place.
How to Prepare for the Increase Financially
To properly prepare your household for this minor interest rate increase, sit down with your current budget and adjust. What you want to do is input your total net income first. Figure in your household necessities such as homeowner’s insurance, utilities and grocery expenses followed by gas expenses for your vehicle, medical expenses and finally your mortgage. Use your current mortgage interest rate and add an additional one-half percent to that. This will be the amount you want to put away toward the increase. In your budget, leave room for a full percent increase. This may also mean making adjustments to other areas such as entertainment, shopping and amusement. If dining out is a big part of your expense list, cut down to going just once per week. These few minor adjustments will leave room in the budget for the increase. It is important for consumers to begin preparing for this increase if they have not seen any changes to their mortgage payments as of yet.
In an attempt to keep Canada, and its residents, thriving, interest rates remained low for years. There are three main purposes for the increase in interest rates. The first is to preserve the good financial standing of the Canadian government. The second is to preserve the mortgage industry and the third is to maintain jobs within the industry. These three factors along with the scare from International entities experiencing financial distress require the slight increase. The Canadian government has made this increase public so that no homeowner is left uninformed. Increases will be gradual so that homeowners are not hit with having to come up with a large amount for their mortgage payments immediately. The notice of these increases is done to give homeowners time to adjust their spending or recalculate budgets. This is in no way an attempt to force people into financial distress or foreclosure situations.
By Cristobal Ravazzano. Visit My Google+ Profile.