How could an increase in the interest rate after one year affect the mortgage balance?

An increase in the interest rate after one year can lead to an increase in the mortgage balance due to the impact on monthly payments and the way interest is calculated on outstanding principal. When interest rates rise, if a borrower has an adjustable-rate mortgage or if they need to refinance, their payments may increase.

In a scenario where the monthly payment does not increase proportionally with the rising interest rate, more of the borrower’s payment will go towards interest instead of reducing the principal balance. If these payments are insufficient to cover the accruing interest, this can result in a situation where the mortgage balance does not decrease as expected, and could even increase due to the compounding effect of unpaid interest.

Additionally, if the borrower has a fixed-rate mortgage and the interest rate rise affects new loans, it could impact the overall housing market dynamics and property values, which also plays a role in the perception of mortgage balances. Thus, under various circumstances, an increase in interest rates can indeed lead to an increase in the mortgage balance.