This morning the Bank of Canada announced an increase to its Prime Rate from 2.70% to 3.20%. You can read the Bank of Canada release here
What does this mean to you and your payments? If you have a $ 250,000.00 mortgage at a variable rate of Prime-1.15% your payments will increase from $1005.14/month to $1064.67/month.
For my clients that are in a variable rate mortgage, we discussed making sure you don’t budget on the rate you are paying but on a higher rate (the rate you would have taken if you got a fixed rate), so that if the rates do go up a bit as they have, your budget doesn’t change-just the amount going to savings.
If you are in a mortgage that is coming up for renewal, you are considering locking into a fixed rate or you are in the market to purchase a new property, your fixed rate mortgage today will be around 3.99% for 5 years. If you were to take a variable rate mortgage today your rate would be around 2.15%.
If you have a $250,000.00 mortgage amortized over 25 years, at 2.15% your payment is $1076.81/month and at 3.99% it is $1313.70/month.
In order for your rate to get to 3.99%, prime rate would have to go o 5.04%, which is a 1.84% increase to what prime rate is today.
I don’t think there is a need to lock into a fixed rate right now. My thoughts are still to let things ride a bit more as variable rate mortgages are substantially lower than a fixed. If you have been in a variable rate mortgage thus far you have enjoyed rates close to 1% for quite some time.
If you are comfortable paying 4% why not pay 2.15% for as long as you can! Just remember if you lock into a fixed rate you can’t get out of it if rates do start going down.
However, I am not making your payments for you. If you decide to lock in your mortgage, even at today's rates, be comforted in knowing you saved oodles of money on interest up until this point.
The next scheduled rate announcement is June 1, 2022.
The Bank of Canada has indicated future rate increases this year. “The timing and pace of further increases in the policy rate will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving the 2% inflation target.”
Whether you are renewing in the next year, getting a new mortgage or are in a current variable rate mortgage, there is a lot of uncertainty and fear around what will happen to you financially if the rates continue to go up.
In an article written for mortgage brokers by Ben Rabideaux, Founder of Edge Realty Analytics, he states “Inflation has a behavioural component to it. In other words, expectations of future inflation can drive spending patterns today, which in turn can create inflation.”
So essentially, inflation creates inflation. Panic buying drives prices up. As a seller this is very exciting, however as a buyer this can cause the stress and fear of missing out. I remember the exact feeling in 2006/2007 when the housing market was performing much like it is today. What I learned from that time is that it is ok to pause and make sure the decision you are making is right for you at that time and not based on fear.
It is hard to predict what is going to happen, but my dear friend and financial planner, Jeremiah Renner had this to say:
"We had our rate hike today of 0.5% and I too subscribe to the thought that there will be an additional 0.5% increase in the next 6 months, which I think will be spread out by 0.25% increases, starting on June 1st. I also think there will be another hike at the end of the summer, 0.25% if the Russia war continues or 0.5% if the Russia war does wrap up by then. The long game will likely be a significant net increase in interest as the Fed tries to cool off the housing bubble in Vancouver and Toronto and by extension, general inflation.
I think this will create a short term surge in housing demand in Alberta, then it will taper back into a regular (if not a bit soft) market over the next year.
With the economy doing well, we won't see a solid recession but we may flirt with that status on and off as people rebalance their life planning and spending philosophies.
Again with higher oil prices, our biggest industry has been refilling their reserves and war chests, which will slowly spill over into expansion and eco-boom in Alberta.
I am not so excited about the other provinces as they cool off due to higher rates and increased pressure to limit foreign ownership.
I can see the prime rate going from 1% at present to over 2% over the next 2 years. That will trickle into higher Bank Prime lending rates and higher mortgages, which I can see sitting around 5% a year from now."
You can find Jeremiah at www.tpfs.ca
On another note, with house values rising, if you have equity in your home, it might be a good time to talk about consolidating some of your higher interest debts into your mortgage and lowering your payments. We can finance up to 80% of the value of your home-you might have more equity than you think!
We are always here to answer any questions you may have about your mortgage.
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