Bank of Canada Announcement

On Wednesday, the Bank of Canada (BoC) increased it’s prime interest rate by 0.50%.  As mentioned in our previous blog post, this has been widely expected since April.  This change affects variable rate mortgage holders, home equity lines of credit and any loans that are attached to the bank’s prime lending rate.  If you have a fixed rate mortgage, this will not impact your current rate or mortgage payment.

As our economy recovers from the pandemic and inflation across the country becomes higher than expected, the BoC’s rates will continue to increase until inflation falls back to a reasonable level.  There is speculation that we will see further rate hikes throughout the rest of the year until consumer spending is under control.

Here is an example of how the new prime rate of 3.70% affects mortgage payments:

Current Prime Rate at 3.20%
$100,000 Mortgage amount
3.20% Prime rate
25 year Amortization
$483.57 per month

New Prime Rate at 3.70%
$100,000 Mortgage amount
3.70% Prime rate (increased by .50%)
25 year Amortization
$509.88 per month

Payment will rise by $26.31 per month for every $100,000 in mortgage.

If you have a discount off of the prime rate for your mortgage, you will still get that discount off of the new rate.  For example, if your mortgage rate is currently prime minus 0.50%, your new rate would be 3.20% (prime of 3.70% – 0.50% = 3.20%).

It’s easy to panic when you hear this all over the news and social media, but rest assured, you are still in a great position with a variable rate mortgage. If you do feel like you want to look at locking in a fixed rate mortgage, please reach out to us.  Right now, lock in rates for a five year term are around the mid 4% range; This depends on your down payment and equity.

Another option is to set your payment as if you are in a fixed rate. This allows you to not be as heavily impacted by future rate increases, while paying down your mortgage quicker and saving on interest.

It’s important to note that 73% of Canadians break their mortgage term at the three year mark, triggering a penalty that can be very large.  By remaining in a variable rate, you would only be subjected to a 3-month interest penalty which is about a quarter of the penalty when in a fixed rate.

Unfortunately, no one has a crystal ball to predict what will happen in the next 12 – 24 months, but we do know that the government will make every attempt possible to curb spending and bring our inflation back to a more reasonable effort.

While we are in a transition state, here are a couple of tips to follow:

• Round your payment to the nearest $100 if possible
• If you want to be more aggressive, set your payment like you have a fixed rate
• Think twice before making large purchases
• Budget ahead of time rather than make spontaneous spending decisions
• Reduce debt in as many cases as you can
• If you have to make a large purchase (such as real estate), be sure to run all scenarios to ensure affordability and qualification, and make sure you have a professional representing you

If you want to read the full report from our very own economist Dr. Sherry Cooper, please CLICK HERE.

The next interest rate announcement from the Bank of Canada is July 13, 2022.  Feel free to share this information with your friends, family or coworkers, and don’t hesitate to contact us with any questions at all!