What is happening with inflation and interest rates?
Let’s start with it is truly anyone’s guess as we are living in unprecedented times. Yes, we expected the bank of Canada to increase rates again today…. No we don’t believe it is cause for worry or stress… but if you want to talk about your situation let us know, we are here to help.But here are the basics …. the Bank of Canada is making changes that increase the prime rate to try to stabilize inflation and with prices spiking to their highest levels in more than 30 years, today’s inflation is more aptly described as ”high and volatile”. And to be fair, things would almost certainly have turned out quite differently if Russia hadn’t invaded Ukraine. But here is the problem…. the supply chain and food shortages are causing price increases…. Not spending…. so how is changing the rates going to fix things? Well, it isn’t. But what it does do is makes people nervous, so they pause. They think maybe I will wait to buy a house, or move up or refinance and book that kitchen reno. And if enough people pause, maybe that gives the supply chain time to catch up with the demand.
So, what happens next?
Well, if the rate increases continue to be imposed on Canadians, there is a possibility of forcing a recession to occur. What does that mean for rates? Well, they would be expected to drop at that point as that is what happens in a normal recession. So people who panicked and locked in to a higher fixed at 4% might truly regret that decision and wind up paying thousands extra in interest to their bank. For clients in variable or adjustable rate mortgages, they will continue to pay less interest through these tumultuous times and if the rates drop, they could have the opportunity to then lock in to lower rates in the future.
How does the rate increases affect you?
Variable Rates: You will see an increase to your mortgage payment of about $24 per $100,000 mortgage. Typically the payment increase comes into effect following your upcoming payment; however, it varies by lender. Your lender will communicate any increase and effective payment date. If you have a variable rate mortgage with some banks eg. TD Bank, your monthly payment may not increase because more of the payment will be allocated to the interest instead of the principal.
TIP: Increasing your payment voluntarily, is a good option if paying your mortgage off faster is a goal for you.
Fixed Rates: Fixed-rate mortgages are not tied to prime rate and aren’t affected.
Lines of Credit (HELOC) If you owe a considerable amount on your HELOC, it may be a good time to consider converting that HELOC into a mortgage. Should I “lock in”? Here’s a great video to watch.
If you lock in or convert, you’ll be getting a new mortgage with a fixed rate and new terms. Locking in does not secure your existing rate. You will be offered a new fixed rate with a term equal or longer than your existing mortgage term. Remember: Fixed rate mortgages also come with a much larger penalty to break your mortgage (up to 900% higher)! Your mortgage shouldn’t keep you up at night. If you’re still feeling uneasy, please contact me to review your offer.
And just a reminder….. Canadians have had to stress test at higher interest rates since late 2016…. so we can afford our mortgages. We have been seeing an upward trend on home values in Alberta as the market remains strong. Real estate has always been a good investment and if your plan is to hold real estate, your property value will go up. So what should you do?
Ignore the media, enjoy your home life and continue on as planned. This too will pass and it isn’t as bad as they say. For anyone who is worried or nervous please reach out…. we would love to have a conversation about your specific situation, goals & how to help you get there in these unprecedented times.
Best, Cheryl
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