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Worry warts still have time to cushion their mortgage against rate hikes

TORONTO – The prospect of higher mortgage rates and stiffer rules that went into effect this week on qualifying for house loans have left Canadians scrambling for answers to their home financing questions before rates rise.

Many Canadians already faced with growing consumer debt are worried about how they’ll continue to make payments once mortgage rates rise. And many others, who want to get into the market ahead of rate hikes wonder how or if they’ll be able to do so.

Big Canadian banks have hikes their fixed-rate mortgage rates by as much as 0.85 per cent in recent weeks and the Bank of Canada said Tuesday that it could raise its key lending rate from 0.25 per cent as early as June, which brings variable and short-term rates into play.

And as the reality of higher rates creeps closer, mortgage holders face a slew of insomnia-inducing questions.

The answers are different for each homeowner or prospective homebuyer, mortgage experts say, but there are some general rules that wise mortgage holders follow in order to cushion themselves against rate hikes.

Jim Rawson, a Toronto-based regional manager at mortgage broker Invis, said those with mortgages coming up for renewal in the next four months and buyers looking to get into the market before rates rise should get pre-approved at current rates, giving them 120 days to lock in.

Refinancing is also an option for those worried about existing mortgages, but owners would have to pay a penalty.

“If you think that rates are going to go up three points in the next two years and you have a year or two left on your mortgage, to pay a small penalty for the peace of mind for the next five years might be worth it,” says Rawson.

Nervous buyers should consider a fixed-rate mortgages for a longer period of time and take comfort in knowing the payment will not change for the term of the mortgage, Rawson said.

“You don’t ever want to put somebody into a variable rate mortgage, although there are savings to be had right now if they’re going to be worried about what happens with rates every night,” he said.

“If they’re going to lose sleep over it, for Pete’s sake take a five-year (rate) at 4.64 (per cent), it’s still an incredible rate.”

New mortgage rules introduced this week will force some consumers to plan for rate hikes because all potential homeowners must now meet the borrowing standards for a five-year fixed-rate loan, even if they choose variable or shorter-term loans.

But the rules will only disqualify about five per cent of the applicants who would be most unprepared when rates rise, leaving about 95 per cent to take responsibility for their own financial security.

Homebuyers who don’t qualify for the five-year posted rate may either have to put more money down, or buy a less expensive property, Rawson said.

“Instead of buying a dream home, they might buy a starter home like most people used to have to do.”

Homebuyers worried about their ability to make payments may have to compromise, says Peter Veselinovich, vice-president of mortgage operations at Investors Group.

“You might have to settle for a little less house initially in order to start building up equity, or you might want to consider having a cushion in your payments.”

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