How high is too high?

Interest rates are starting to rise ... how will you deal with increase on your cost of living?

For many with substantial size mortgages and balances on credit cards an small increase can mean the difference between dinner out and paying the hydro bill. 

The impact of increasing interest rates is one of the most overlooked risks when borrowing money

Why do we overlook or ignore something so obvious? Usually it comes down to two things ....

First, if you have a variable rate mortgage the pressure mounts to convert to a fixed rate to limit your exposure to the potential of rising interest rates. The pain or cost of not doing anything is so far away (maybe at renewal time) why change. And besides what happens if interest rates don't increase as much as you had anticipated, you've just paid fees now for nothing.

I still remember people locking in there residential gas prices a couple of years ago when oil prices sky rocketed, only to watch them come down 6 months later. Only later did they realize the fees to get out of these contract were horrendous.

Secondly when you purchase something like a home with borrowed money you only look at the impact that interest rates will have on your mortgage payment. As interest rates go up so does the cost of everything.

So now it is not just your mortgage increasing 300 dollars a month, your food bill goes up 50, your entertainment expenses are up 100 and gas is up 75. Now your monthly budget is being squeezed in all areas.

Check out this video from Edmonton Journal website "The Rising Cost of Guilty Pleasures"

The Bottom Line

The key is review your budget and cash flow first then go see your mortgage broker. Once you know how an increase will effect your cash flow, then you decided if and when to lock in your mortgage.

This subject raised a question for me ... just how of increase in your mortgage payment would it take to consider locking in your mortgage. Most follow interest rate increases ... but I wanted to know the bottom line ... how much monthly would it take each month to consider locking in your mortgage. (Feel free to add your comments on your experiences below).

To find out more I went to a friend of mine Cathy Carolei mortgage broker with Mortgage Centre and fellow member of the Okanagan Business Referral Group to ask her what her experience has been. Here is what she had to say.

"I have asked a number people over the last couple of days and the average is $100-200 increase that they could live with (before considering refinancing). I believe it is a personal feeling if you can stand to sleep at night and have the variable, it has proven itself throughout history. If this is not your comfort zone, try the fixed payment on the variable rate as a precaution. This especially so if you are a first time buyer, or on a fixed income."

Thanks Cathy!

Which ever way you decide make sure to sit down and review your options (with your financial advisor, financial software or the good old piece of paper) before interest rates become an issue. 

This can save you money and give you financial peace of mind.
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