What is Payment Shock & how do I deal with it?

With all the recent talk about interest rates, it is appropriate to talk about payment shock. Payment shock is when you renew your mortgage from a low interest rate to a higher rate. This is what contributed to a lot of the problems in the U.S. People were in low teaser rate mortgages and when they came due they had to renew at a much higher rate, making their mortgage unaffordable for them. The mortgage rules in Canada have always tried to ensure that this doesn’t happen by qualifying variable rate mortgages at a higher rate, but you can still experience the payment shock when renewing.

One way to deal with this is to ask yourself the question: “What do I think the mortgage rates will be down the line when my mortgage comes due for renewal?” Then calculate what the difference is in the payment between what you are currently paying and what you would pay at the higher rate.  Pay this difference onto your mortgage every month. This will get you used to paying a higher payment so that when and if it does happen it won’t be such a shock. You will be paying the principal down faster during this period and thereby saving thousand of dollars in interest.

You have no way to actually know what the rate will be in the future but at least you would be preparing yourself in advance and saving interest at the same time.

We can assist you with a plan to avoid payment shock. Ask us today! We are always here to help.