The Bank of Canada increased the Prime Rate by 1.00%.
This was a bit of a surprise as we have not seen an increase like this since 1998 - back when my hair was brown and I was much thinner!
Let's look at the real numbers of how the change will affect you and what risk you take on if you decide to lock in. Feel free to share this with any friend who is worried about what impact this increase will have on their mortgage…
If you have a fixed rate mortgage:
The Bank of Canada interest rate changes do not affect you.
If you have an adjustable-rate mortgage (loan where the payment changes):
You should expect your payment to be increased by your lender at the start of August by about $52/month for every $100k you owe in mortgage money. If you are paying weekly or biweekly accelerated and feeling a cash crunch, consider switching to monthly payments.
What to do if you have a variable rate mortgage (loan where the payment is static):
Your payment stays the same but an extra $52/month for every $100K you owe in mortgage money will go towards interest rather than principal; however, it may be time to voluntarily increase your mortgage payment to stay ahead of a forced payment change if/when your payment no longer covers the interest. If that happens, your lender will reach out to you with options (which normally are to increase your payment slightly or increase your amortization if there is room to do so… but every situation is a little different here). If you are concerned about this book a call.
The Risks of Locking In
With a variable or adjustable rate mortgage, the key is that your payment may go up and down but statistically over the 5-year term, no fixed rate mortgage has ever saved more interest than the variable rate mortgage. Yes, we are experiencing an increase right now (everything is more expensive - gas, groceries, building materials - this is inflation); however, if we have a recession (it is anyone's guess but most economists are now predicting this will occur in the next 12-24 months) then the prime lending rate will start to drop and at that point.... locking in now would be a commitment to the highest interest rates we’ve seen in almost 15 years and self-imposing a higher payment as there is still a large spread between fixed and variable rates. You would also be committing to higher penalties so should the recession come, you would be looking at either staying in your high fixed rate or paying a large penalty to exit it.
Honestly, the variable is meant to fluctuate and if it behaves the same way it has for the last 50 years, you will save more money than you would with a fixed rate.
Should I Lock In?
Well, the answer to this is different for everyone but if you do lock in, it may cost you about $139/month per $100,000 more (which is a lot more than today's increase will cost you). For the majority of people, the reasons they chose a variable or adjustable mortgage are still holding true and by locking into a higher rate, they are not further ahead with a higher payment on a fixed rate mortgage. Personally, I am not locking in at these current high fixed rates and I enjoy that my variable rate mortgage costs me less than what the fixed rate would cost me if I did lock-in. And if the lower rates never come... I will still save more money in interest during my 5-year term with the variable than I would have paid to the lender with the fixed… but that is me.
If you are considering locking in, I would recommend taking the difference in your payment from your current variable rate to a new fixed-rate payment (eg. $400/month) and putting it into a separate savings account rather than locking in. You can use this, later on, to help pay down debt, put a lump sum payment against your mortgage, or handle any unforeseen expenses that come up in the future.
If you are worried or want to chat about your personal situation, book a call.
If you are pre-approved and shopping for a home:
Make sure that you have the correct pre-approval numbers. This increase in the Bank of Canada rate actually increases the minimum qualification rate for the stress test…. so your buying power could be reduced and you are at risk of shopping for a home slightly higher than what you may qualify for. Reach out to us to confirm your current pre-approval numbers.
Managing Your Monthly Cashflow
If you are thinking about going on a trip or buying a new quad, now is the time to pause and consider: how is the purchase going to impact your monthly cash flow?
If you plan on using a credit card or a loan, consider waiting until you have a good cushion in your savings. Keep in mind the interest you are paying on your credit card or vehicle loans is way higher than your mortgage interest rate.
If you have enough equity in your home, we could consider doing a refinance to consolidate debt into your mortgage which will help with monthly cash flow.
FYI, the next Bank of Canada Announcement will be on September 7th.
We know uncertainty can be challenging, but we’re here to help!