Don't Get Caught Off Guard By Rate Hikes

If you have a variable rate mortgage, you're not alone. A new Bank of America/Merrill Lynch report reveals that 66% of Canadians now have mortgages that are floating with prime - up from the typical 30%

There's absolutely nothing wrong with having a variable rate mortgage, but the Merrill Lynch report reiterates that these mortgages would be affected by an increase in the Bank of Canada's overnight lending rate - something not all mortgage holders are prepared for.

While the Federal government changed the mortgage rules so that anyone applying for a variable rate must now be qualified on the five-year fixed, let's be realistic - not everyone ends up paying that higher rate. To free up monthly cash flow, most mortgage holders prefer the lowest rate possible so they can afford additional expenses more comfortably. Judging by the Bank of Canada's most recent announcement, it doesn't look like it's going to be raising interest rates anytime soon - but that doesn't mean you shouldn't get your finances in order now.

At one point, your household was approved on the going five-year fixed rate - so it might be a wise move to take a look at your budget, trim frivolous spending and increase your mortgage payment. That move will lessen the blow when rates eventually rise. Because they will rise - and when they do, they may increase quicker than you currently expect. As little as a 2% increase in the lending rate will erase any savings variable rate holders are currently experiencing. If the Bank of Canada increases its lending rate by increments of 0.5%, you'll only have four months to adjust.