All the rage in the world of mortgage loans, holders of variable rate loans with fixed repayments are affected.
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Following the successive increases in the interest rate, the monthly installments of these loans no longer cover the interest, whereas in addition to this, they would have to pay part of the capital borrowed. This tipping point is called the trigger rate. Financial institutions contact borrowers to remedy the situation. What to do?
Do not panic! There are several options to help you out while the storm calms down. Here are a few.
Extend the amortization period
Amortization over a longer period makes it possible to reduce monthly payments. For example, for a loan of $200,000 with a remaining amortization of 15 years with a term of 5 years at an interest rate of 6%, the monthly payments are $1679. By extending the amortization over 25 years, they decrease to $1279. A difference of $4800 per year.
Of course, in the long run, you will pay more interest. But you will have the opportunity to adjust the amortization at the next renewal, once the situation is back to normal.
If your loan is already amortized over 25 years, note that not all financial institutions will agree to extend it to 30 years and even less to extend it further.
Choose a fixed rate
Alternatively, abandon the variable rate and opt for a fixed rate. We all know that the variable rate is beneficial in the long term. However, perhaps you should consider giving it up for a while. Again, you can review the situation at the next renewal. Until then, a fixed rate will give you some security.
Choose a variable rate and reimbursement
By not capping your repayment, you will be able to absorb interest rate fluctuations. Unconditional fans of the variable rate will choose this option. The empirical evidence on the benefits of variable rates backs them up.
Make a prepayment
Generally, financial institutions determine in advance in the mortgage deed the framework within which you can make an early repayment. This will reduce the borrowed capital.
For example, for a $200,000 loan amortized over 25 years and a 5-year term at 6%, suppose that following two years, on the 24e monthly payment, you accelerate repayment by adding $200 per month for the last three years of the term. So when it runs out, you’ll have saved $697 in interest.
Another possibility, from the 24e monthly payment, you add a one-time payment of $5,000 per year to the monthly payment. At the end of the term, you will have saved $1902.
In conclusion
We are currently going through a turbulent period with respect to interest rates, which forces us to review certain priorities. In this kind of situation, it is advisable to remain calm and not to make a hasty decision. Start by analyzing your situation with a clear head. What are your short term plans? Can you defer certain expenses? Financial planning will help you find solutions.
Advice
- Be proactive! Present a proposal that suits you to the financial institution. Chances are that a reasonable offer will be accepted.
- Seek help from a loved one to help you through this difficult time.
- Consult a financial advisor who will help you plan your finances. In financial institutions, it’s free.
