As the Bank of Canada hits cottage owners with another rate hike, many cottage owners are either fast-approaching or have hit their trigger rate—the point at which their monthly mortgage payments only cover interest, and none of the principal loan.
The key interest rate jumped from 0.25 per cent during the early days of the pandemic to 4.5 per cent on December 7, at the Bank of Canada’s last policy decision meeting of the year. Climbing interest rates have made it harder for cottage owners whose variable-rate mortgages fluctuate with the overnight rate. One option that is becoming more popular with property owners is having lenders shift some of their interest costs onto their principal.
While the option is not new, Kim O’Grady, a real estate broker with Chestnut Park Real Estate in Huntsville, Ont., explains that this strategy has come up more frequently in conversations with mortgage brokers in her network.
But O’Grady says there are downsides to this option. “It’s like paying just the interest on your credit card because if you’re only paying the interest, you’re really not getting further ahead on your payments,” she says.
“Now you’re looking at extending the term of your mortgage just so you can continue to afford to live there,” says O’Grady. “Increasing your amortization beyond 25 years could force you into a longer-term mortgage.” In other words, rolling interest onto the principal loan means it will take longer for individuals, including some cottage owners, to pay down their mortgage.
Advice to new entrants in the cottage real estate market
“First, speak with a mortgage broker before you even start looking for a property—that should be your first conversation,” says O’Grady. “That conversation should be with your mortgage broker, not a real estate agent, so that you can find out what you actually qualify for.”
While it sounds obvious, O’Grady says it’s important to find a home you can comfortably afford. “If rates continue to go up—even with the stress test and whatnot—you’re going to feel good knowing that you can afford this property.”
“My advice to buyers in this market right now is to work with a trusted mortgage broker who can advise you in what’s the best plan for you, and then work with a real estate professional who’s going to help guide you to stay within your means without overextending yourself,” says O’Grady.