How Will The New 0.25% Interest Rate Hike Affect Your Mortgage
For the first time in 7 years, the Bank of Canada (BoC), has raised its benchmark interest rate from 0.5% to 0.75%, an increase of 0.25%.
Other banks, the Bank of Montreal and the Bank of Nova Scotia have said they expect another rate hike in October.
“The overall tone of the statement and the bank’s updated forecast are on the upbeat side of expectations” – Douglas Porter, Chief Economist, BMO
What does This Mean For Canadian Mortgage Holders?
Variable interest rates move up or down coinciding with the general level of interest rate in the economy. Variable-rate holders will see their monthly mortgage payments go up if the BoC raises rates (BoC expect to raise rates in increments of 0.25 of a percentage point)
Here is an example:
Home price: $750,000
Down payment: 10%
5 Year Variable-Rate/25 year: 1.75%
(Updated) Mortgage Payment: $2,864
With an increase of a quarter of a percentage point, that monthly payment would go up by $83 more per month.
Most Canadians with fixed-rate mortgage will likely pay a higher interest rate when renewing.
Fixed-rate mortgages are fixed through the agreed term of the loan and tend to follow bond yields. Because bond yields are affected by investors expectations about what BoC will do, the interest rate hike has indirect implications for fixed-rate mortgages.
“The mere mention of a rate hike had an effect on bond yields, already resulting in an increase in the popular 5-year fixed rate mortgages over the last month” James Laird, Co-founder RateHub.ca and president of CanWise Financial
Mortgage Advice From Broker Jeff Ingram
Jeff, is a member of the Mortgage Brokers Association of British Columbia, as well as the Canadian Association of Accredited Mortgage Professionals.
Is it time to panic? Absolutely not.
The quarter point increase to Prime today will affect monthly payments by a mere ~$13 / month for every $100,000 of mortgage on a 25 year amortization.
If someone were to lock in their rate today, they would be converting to a 5 year fixed rate somewhere between 2.79% and 3.09%. Most clients in variable rate mortgages today are in the low 2% range. A quarter point increase to their rate is still well below the rate they would be locking in to. A strategy that we recommend is, rather than “locking in”, simply increase your payment to mimic that of the fixed rates. This will give you the same payment you would have had on a lock in, however your interest rate remains lower and you are shaving years off your amortization because the extra payments are going directly towards your principal balance, interest free.
History tells us that the variable rate has won, every single time, since they began keeping track of these trends over 50 years ago. In times of uncertainty I tend to look at historical data like this. I am still a proponent of the variable rate mortgage, and it definitely is not time to hit the panic button.
Want to see how much your mortgage will be? Use this Mortgage Calculator
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