Is It Time For A Strategy Call?
This morning the bank of Canada increased their interest rate by 0.75%, bringing Prime lending rate to 5.45%.
What does that mean to you if you have a variable rate mortgage? If you have a mortgage of $300,000, your payment will go up by $129.00/month.
So what do you do now? If you are wanting to crunch numbers or want to look at refinancing, renewing, or locking in your rate, reach out to me and my team. We are happy to go over your options with you.
In the media release, Governor Tiff Macklem indicated that we should expect another rate increase on October 26, 2022. My perspective is that the Bank of Canada knows they are being quite aggressive, and it is intentional so that they force inflation to decline. The biggest fear of the Bank of Canada is that inflation will become entrenched.
As per June 2, 2022 Press Release from the Bank of Canada, “inflation becomes entrenched when it feeds on itself. Prices rise because other prices are rising and because the cost of labour is going up. In a situation like that, inflation becomes self-fulfilling because households and businesses expect that it will stay high or keep rising, and they act accordingly.”
Will that push into a recession? We have yet to see but I wouldn’t be surprised to see that happen. The question of course is when.
When speaking to clients recently there are a few common questions that come up, and I would love to share those with you, along with my responses.
What is a 5 year fixed rate right now?
A fixed rate for 5 years, with less than 20% down (high ratio mortgage) is sitting at 4.59%. At the end on June of this year they were at 5.09% so they have come down.
Should I lock in or stay in a variable rate mortgage?
It is hard for me to provide a clear-cut answer on that because it depends on you and your situation. However, here are a few things to consider:
Will you be paying out your mortgage in the next few years (selling, paying off etc)?
If you are selling your home in the next few years, is it possible that you might not buy right away or you are moving to another province?
Are you still comfortable making the higher mortgage payments? Can you handle another increase in October?
It is worth having a conversation about your situation and how you are feeling, and from there we can discuss your options. If locking into a fixed rate is what you decide to do we will approach your current lender. If we find another rate elsewhere that is better than what you are being offered we can look at transferring your mortgage to that lender.
·My mortgage is coming up for renewal in the next year. Should I pay the penalty and renew early? I am really worried about my payments going up.
Let’s do an example. Let’s say you took out a $300,000 mortgage 5 years ago at a rate of 3.09% with monthly payments of $ 1433.63/month. It is now 5 years later and you owe $ 256865.00. Using a fixed rate of 4.59%, your payments will increase to $ 1631.54, which is a difference of $197.91/month. While that is a difference it is manageable. My suggestion is that you hang on to that lower rate as long as you can but begin to budget now for the higher payment. That way when your mortgage comes up for renewal you are already used to that payment.
Some important things to note:
We can hold an interest rate for up to 4 months prior to your renewal date, so if you are in that window give us a call and we can get that started for you.
Property values have increased which means you might have some equity in your home. We could look at refinancing your mortgage to combine your debts into one payment which would lower your overall monthly costs.
In October of 2016, the Federal Government introduced the “Stress Test”, which is a higher rate used for qualification on a mortgage. It was meant to protect borrowers from getting in over their head in case rates when up.
For quite some time, that rate has been 5.25%. Why am I mentioning this? Because when we approved you for your mortgage, we were using this higher rate for qualification. That means you did qualify for a mortgage at todays rates. While higher rates are still not awesome it does provide comfort knowing that you did qualify for a mortgage at these rates.
Now here are some interesting figures I pulled up for you. If you’re a “numbers calm me down” nerd like me you might like my fancy little chart.
You might notice a significant drop in rates from 2008-2009. This is when the global economic crisis happened and the markets, well, crashed. In 2008 real estate was booming in Alberta-very similar to what was happening over the last couple of years.
February of 2008 was the last time Prime lending rate was over 5.45%.
Fixed rates were much higher in 2008 than they are today.
*The average mortgage amount is pulled from my own database as were the rates that my clients received at the time.
Average hourly wage source: https://www150.statcan.gc.ca/n1/pub/14-28-0001/2020001/article/00006-eng.htm
Average house price source: https://wowa.ca/reports/canada-housing-market
As mentioned, please reach out to me and my team if you want to chat.
Renee Stribbell, Shelly Shapiro and Mary Juneau