Bank of Canada Increases Rates... Now What?
Panic, Perspective and the Media
I can completely understand the concern around rates and what is going to happen. I think all of us are worried about affordability going forward.
The media is fueling this fire and creating exactly the news-worthy panic they desire. It’s unfortunate as they are making it sound like the sky is falling and the world is ending.
“What is going to happen to my payments? I am coming up for renewal-what are my options? I’m really nervous that I wont be able to afford my mortgage payment going forward.” These are valid and real concerns. I hope that by giving you information it might ease some of the fear.
We saw an increase of 1% to Prime lending rate today. We were thinking 0.75%, so it is higher than what we expected. In fact, they are being quite aggressive with the prime lending rate.
The thoughts were that they would raise Prime by 1-1.50% more this year, and based on their release today, they decided to increase more today with hopes they can do smaller amounts on September 7, 2022.
This is a great article by an economist that I have followed for the last 20 years. Click here to read Benjamin Tal’s perspective. Benjamin Tal
Here is what we know:
-There is a labour shortage, which usually means wages will increase as employers compete to high skilled labour
-Inflation was at 7.70% as of May of this year, which is the highest we have seen since 1983. The Bank of Canada predicts inflation around 3% by 2023. Bank of Canada Release
-The Canadian economy is very sensitive to rates as most of us have payments other than our mortgage which cause added financial stress. Therefore I believe that it couldn’t handle double-digit rates as it would, in my opinion, cause a major recession.
-While it isn’t awesome, prime lending rate isn’t crazy high, but higher than we have seen in quite some time. I remember in 2006 in Alberta where housing prices were higher than they are now and rates were at 5-6%.
-The rate increases are influencing house prices for a couple of reasons. The cost of borrowing has gone up which reduces a borrowers’ buying power, and some buyers are holding off on purchasing
If you wish to lock in your mortgage rate, you just need to call your existing lender and ask them to lock you in. Fixed rates are over 5% right now, so you may want to hold off, as even with the rate increase today you are still lower than a fixed rate.
Banks want you to lock into fixed rate-they make way more money off you if you do.
Let’s look at some numbers. I am taking the rates during the pandemic out of this as that was a blip in history where rates went to near zero. In a normal economy it is not reasonable to expect rates to be that low.
At the end of 2019 Prime lending rate was at 3.95%. It is currently at 4.70%, so it is not much higher than it was prior to the pandemic.
If prime rate goes to 5-5.25% by the end of the year, which is something we should plan for, and you are in a variable rate, your rate will be around 4-4.25%. As you had budgeted for this already it just means that your payment is at the higher end of your budget.
Here is my thoughts. If you lock into a fixed rate now and rates come back down, which logic and history indicates they will, then you will only be able to take advantage of the lower rates by paying a very large penalty. The only way it would be more cost effective to take a fixed rate right now is if prime rate goes to 6% and stays there for the next 5 years. While I cannot predict that far in advance I would be surprised if it did.
The buzz is that this upwards rate pressure is pushing us into a recession. Historically this is exactly what happened. We are climbing to the top of the rollercoaster and are going to be hitting the peak. When is the question on everyone’s mind.
I spoke to a client yesterday and he said that he knew I was going to tell him to ride the wave, which I did. We have been on the lower end of rates for quite some time, even with the increases this year. We are now seeing the top of the wave.
We can absolutely review your mortgage and your options, whether you are renewing this year or buying. We can also look at using the increase in property values to refinance your mortgage to payout some of your debt and lower your monthly borrowing costs. Let’s discuss what might be an option for you!
I am away this week but if you call my team, Shelly or Mary, will be happy to answer any questions you might have.
I just want you to know that while I know you are going to be ok and that you will make it through, it just might not feel like that right now. Looking at the numbers and the facts usually helps me calm my fears. I hope it does for you too!