By Lawrence Belanger
Local Journalism Initiative
Local homeowners with variable rate mortgages are facing difficult decisions about how to make their monthly payments, as the Bank of Canada has been raising interest rates throughout the last year in a bid to ease inflation. Vince Cuddihy, a retired Champlain College economics professor, explains that when the Bank of Canada raises interest rates on the loans it makes available to commercial financial institutions such as RBC, CIBC, or Desjardins, the banks then pass that on to their clients, raising the interest rates on the loans they’ve dispersed.
Cuddihy explains that, in general, when making payments on your mortgage, “you pay off the principal, but mostly the interest.” The problem now is that, with higher interest rates, more of your monthly payment is going towards just the interest, and not paying back the money that was borrowed. Say you have a mortgage that is supposed to be paid off in 20 years and were making a payment of $300 a month. Last year, when interest rates were lower, your $300 would pay off a bit of the principal and some of the interest. Cuddihy says that now, because interest rates are higher, in some cases all of this theoretical mortgage payment would now go towards just the interest, meaning that it won’t be paid off in the time allotted.