How Do Interest Rates Affect Your Payment?
Interest rates are central in determining one’s monthly mortgage payment. As the Bank of Canada adjusts rates in response to economic conditions, it’s important to understand how those changes can affect your mortgage. Depending on whether you have a fixed or variable rate mortgage, the effects of interest rates will vary. With a fixed-rate mortgage, your rate will remain the same for the entirety of your term. A variable-rate mortgage, on the other hand, can fluctuate throughout your term, depending on your lender’s prime rate.
When interest rates are cut, those with variable rate mortgages may see a decrease in their monthly payment, but it ultimately depends on their mortgage structure. Some variable rate mortgages will have fixed payment amounts, where only the interest portion decreases, leaving more of the payment towards the principal. This shortens the amortization term and increases the rate at which you can pay off your mortgage.
Below is a table that depicts this shift in the mortgage payment mix:
| Scenario | Monthly Payment | Interest Portion | Principal Portion |
|---|---|---|---|
| Before Rate Cut (Fixed Payment VRM) | $2,000 | $1,200 | $800 |
| After Rate Cut (Fixed Payment VRM) | $2,000 | $1,000 | $1,000 |
| Before Rate Cut (Adjustable Payment VRM) | $2,000 | $1,200 | $800 |
| After Rate Cut (Adjustable Payment VRM) | $1,850 | $1,050 | $800 |
To determine the impact of interest rate changes on your payment, it is essential to familiarize yourself with the terms of your mortgage.
How to Lower Your Mortgage Payment?
While a Bank of Canada rate cut can lower your monthly payment, there are numerous other ways in which you can take action to lower your costs.
- Refinancing Your Mortgage - At the end of each term, you can negotiate the conditions of your mortgage, whether this be switching to a different rate type or a new lender altogether. This gives you the opportunity to find the lowest possible rate and mortgage type that best fits your needs.
- Recasting Your Loan - By making a lump-sum contribution towards your mortgage balance, you can ask your lender to reamortize the loan based on the remaining amount. With a smaller balance, you will be able to pay less each month.
- Extending Your Amortization Period - Increasing the time over which you seek to pay off your mortgage will help decrease your monthly payments. Keep in mind that while you will be paying less each month, it will result in more total interest paid.
- Applying For Mortgage Deferrals/Modifications - If you are facing financial challenges, you may qualify for mortgage modification, which can change the terms of the loan to avoid foreclosure. These are usually short-term solutions and only done in emergency circumstances.
Evaluating your current mortgage progress and long-term financial goals can help you determine if one of these options is right for you. While having a lower payment can be tempting, it is essential to keep in mind that doing so can affect the length of your mortgage and create a future financial burden.
When Lower Rates Do and Don’t Help?
While a rate cut generally suggests lower mortgage payments, its actual benefit varies. Here are some scenarios in which rate cuts would or wouldn’t be beneficial based on your circumstances.
| Beneficial Scenarios | Limited Benefit Scenarios |
|---|---|
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The difference between the scenarios ultimately comes down to mortgage structure and timing. If you are early on in your mortgage or have a mortgage plan that benefits from rate changes, then lower rates can be very helpful. On the other hand, if you have a fixed mortgage plan or already have a low remaining balance, the benefit of lower rates is limited.
What Are Mortgage Agents Saying?
Following a period of high rates over the past few years, mortgage rates have finally started to move lower. Canadians can expect lower mortgage rates in 2025 due to interest rate cuts by the BoC, making it a great environment for homeowners and buyers.
Mortgage agents recommend that you take time to evaluate your current mortgage plan and identify ways to make the most of these cuts and lower your payment. Reaching out well ahead of your renewal date and planning early can help you lock in savings or explore better options with other lenders.
For those with fixed-payment variable-rate mortgages, brokers emphasize that even if your monthly payment doesn’t change, more of it will now go toward the principal — a silent but meaningful advantage for long-term homeowners. Meanwhile, those with adjustable-rate mortgages may see their monthly payments drop directly. Finally, for fixed-rate holders nearing renewal, the current rate environment could offer a timely opportunity to reduce costs going forward.
Not sure how a rate cut impacts your situation? Contact Clover Mortgage to book an appointment with a mortgage agent today!
FAQ
Are Mortgage Rates in Canada Falling Right Now?
With two interest rate cuts already being made this year and more to come, mortgage rates in Canada are expected to be lower in 2025. This creates a great opportunity for homeowners and buyers to save!
Will My Lender Automatically Lower My Payment If Rates Drop?
Yes! If you have an adjustable-rate mortgage, your lender will adjust your payment soon after a cut is made.
Can I Lock In A Lower Rate Before My Term Is Up?
Yes, but it may involve a prepayment penalty. Lenders often charge a fee for cancelling your contract before the term ends. In some cases, this can still be beneficial if the long-term savings outweigh the cost of the penalty.
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