What is Payment Shock?
Payment shock is a term we use with our clients to describe what happens when we go from a very low rate environment to when our clients renew into a new mortgage where the market rates have increased.
- Mortgage Amount of $350,000
- Interest Rate of 3.09%
- Monthly Payment of $1,672 (25 year amortization)
On Renewal after 5 years:
- Mortgage Balance of $299,675
- Renewal Rate of 5.5%
- Monthly Payment of $2,050 (20 years remaining on amortization)
You will see an increased payment of $378, this is what we call Payment Shock.
Each year we suggest clients keep a pulse on the market and adjust payments as if their interest rate was increasing with the market. That way the small adjustments are much more comfortable to budget and by the end of the 5 years our clients are comfortable with the increase in payment and at the same time have paid their mortgage down much faster.