Prime Rate Increase Will Cost Homeowners $450

Alyssa Furtado
by Alyssa Furtado July 22, 2010 / No Comments

Following the Bank of Canada’s target lending increase, we saw banks and lenders increase their variable mortgage rates. Current homeowners in a variable rate mortgage know this is bad news, but how much will this cost them on a monthly and annual basis?

We thought we’d put the 0.25% prime rate increase into perspective with some numbers:

1. FACTS
Interest rate before most recent prime Increase: 2.50%
Intereat rate after prime increase: 2.75%

2. ASSUMPTIONS
Mortgage value: $300,000
Amortization period: 30 years

3. COMPARISON
Monthly Payment
Monthly payment (2.75%): $1,222
Monthly payment (2.50%): $1,183
Difference:      $39  per month

Annual Interest
Average interest per year (2.75%): $4,505
Average interest per year (2.50%): $4,057
Difference:   $448 per year ($39/month * 12 pmts/year)1

Total Interest
Interest over amoritzation period (2.75%): $135,142
Interest over amortization period (2.50%): $121,703
       Difference:  $13,489 ($39/month * 12 pmts/year * 30 years)1

The increased interest is manageable on a monthly basis, but it quickly adds up when you consider the increase on an annual basis. However, we cannot look at this increase in isolation. With 2 increases in as many months, homeowners who locked into their variable rate mortgages at 2.25% will see the interest over their full amortization period increase ~$26,500, with the two most recent prime increases. With these sharp increases in interest owed, we will begin to see how important qualifying rates are to variable rate mortgages.

All interest rate calculations were completed with Ratehub.ca`s easy to use mortgage calculators. For interest rate numbers that consider your unique situation, please try our mortgage payment calculator.

1 Numbers have been rounded-up.
2 This assumes fixed and variable rates will stay constant over the full amortization period