What should I do if I just can't meet new higher payments when interest rates rise?
An obvious answer is to reduce your other expenses. If you keep track of all your spending for a month or two you may find areas in which you can cut back. In some households, though, that's easier said than done.
Another solution is to negotiate with the lender to keep your payments at the old lower level and extend the term of the mortgage.
Let's say you've had a $100,000 20-year loan, fixed at 7 per cent some time ago. Monthly payments are $775.
If your mortgage rate rises to 8 per cent, you can keep your payments constant at $775 by extending the loan to 25 years, as our table shows.
And if rates rise to 9 per cent, you can still keep paying $775 a month if you extend the loan to 40 years.
There's a big downside though. At 8 per cent, over the life of the loan you will pay more than 50 per cent extra in interest. And at 9 per cent, you will pay more than three times as much interest.
Of course, most people won't own the same home for 20 years, let alone 40 years. But you'll still be paying much higher interest for the period in which you do own the home.
There's another point too, which is particularly relevant if you own your home for a relatively short period.
The longer the term of the loan, the smaller the proportion of your early mortgage payments that will go towards reducing the principal.
In our example, with a 20-year loan, after five years you will have paid off $13,700.
But with a 40-year loan, you will have paid off a mere $1900. And with a 50-year loan, you will have made only a $600 dent.
If you do extend the term of your loan, it's a great idea to reduce the term again later, whenever your income rises or mortgage interest rates fall.
An obvious answer is to reduce your other expenses. If you keep track of all your spending for a month or two you may find areas in which you can cut back. In some households, though, that's easier said than done.
Another solution is to negotiate with the lender to keep your payments at the old lower level and extend the term of the mortgage.
Let's say you've had a $100,000 20-year loan, fixed at 7 per cent some time ago. Monthly payments are $775.
If your mortgage rate rises to 8 per cent, you can keep your payments constant at $775 by extending the loan to 25 years, as our table shows.
And if rates rise to 9 per cent, you can still keep paying $775 a month if you extend the loan to 40 years.
There's a big downside though. At 8 per cent, over the life of the loan you will pay more than 50 per cent extra in interest. And at 9 per cent, you will pay more than three times as much interest.
Of course, most people won't own the same home for 20 years, let alone 40 years. But you'll still be paying much higher interest for the period in which you do own the home.
There's another point too, which is particularly relevant if you own your home for a relatively short period.
The longer the term of the loan, the smaller the proportion of your early mortgage payments that will go towards reducing the principal.
In our example, with a 20-year loan, after five years you will have paid off $13,700.
But with a 40-year loan, you will have paid off a mere $1900. And with a 50-year loan, you will have made only a $600 dent.
If you do extend the term of your loan, it's a great idea to reduce the term again later, whenever your income rises or mortgage interest rates fall.
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