What to expect with the Bank of Canada’s increase in their target Overnight Rate
As you’ve likely seen on several newsfeeds, on July 12th, the Bank of Canada increased their target Overnight Rate for the first time in almost seven years. The increase was by 0.25%, pushing the target rate from 0.50% to 0.75%.
Back in 2015, when the Bank of Canada cut their target Overnight Rate by 0.50%, the Big Banks did not pass on the full decreases (they only cut by 30bps). However, with this new increqase recently, the main Big Banks (with the exception of a couple who use a different rate structure) announced they’d be increased their Prime Rates by the full 25bps from 2.70% to 2.95%.
WHY THE INCREASE?
For the most part, this increase in target Overnight Rate needed to happen and is positive in the long-term. It means our economy is doing better and our unemployment rates are decreasing. Among other reasons, this increase came in response to:
- The potential of a housing bubble;
- Increasing levels of household debt and the debt levels of investors reaching for higher yields in today’s real estate market; and
- Pension funds and insurance companies facing increasing long-term liability shortfalls from not earning the returns they needed in order to cover their long-term obligations.
WHO DOES THIS INCREASE AFFECT AND HOW?
If you are someone with a variable rate mortgage, you will see an increase in your interest rate, interest payments, and for many, in your mortgage payments. Your rate was locked in at “Prime MINUS 0.XX%” and as “Prime” changes, your rate moves with it.
Mortgage payments with many Lenders will fluctuate with rate changes but some Lenders have a payment structure where payments will remain the same (up to a cap) and instead, your payments will go more to the interest and less to the principal of your loan.
For the current increase of 0.25%, you can typically expect an increase of $12/month for every $100,000 mortgage loan amount.
If you are someone with a Home Equity Line of Credit (HELOC), the interest rate on your borrowed money is also tied to Prime and will therefore will also increase by 0.25%.
IF YOU CURRENTLY HAVE A VARIABLE RATE MORTGAGE, WHAT ARE YOUR OPTIONS?
If you currently have a variable rate mortgage and are nervous with the changes, your options are:
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Stay with your variable rate mortgage product and wait out your term.
Historically, as they start off with lower rates, variable rate terms have almost always resulted in savings throughout the term in its entirety. However, this is still not a guarantee as none of us can see into the future.
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Convert your variable rate mortgage into a fixed rate mortgage.
If you choose to go with this option, the rate you will be able to lock into will be not be one of the best promo rates available. Instead, you will likely be locked into the posted rate available for the mortgage term (of between three to five years) that is closest to the length of time remaining on your mortgage.
WHAT IF YOU’RE ALREADY LOCKED INTO A FIXED RATE MORTGAGE?
Then you have nothing to worry about. Changes in Prime or the Bank of Canada’s Overnight Rate does not affect you. Your rate and payments will be secure until the end of your term.
The main factor that affects fixed rates is Government of Canada “bond yields”. To learn more about this, please contact me or stayed tuned for a future post about what affects rate changes.
WHAT TO DO IF YOU’RE STILL HOUSE HUNTING?
Now is the time to lock in a rate.
With most Lenders, we can lock in a rate hold for you for 120 days. Keep in mind that the rates we can hold for you are sometimes not the best promo rates that are available (as those often require a live deal or quicker possession than 120 days). However, once you put in an Offer, as long as you qualify with that Lender and your possession day falls within the time frame of the rate-hold, you can rest assured that you will have the opportunity to lock into that rate or lower (if there is a new promo rate available).
MORE CHANGES?
Future rate increases? Likely there will be another rate increase of 25bps (ie. 0.25%) by the Bank of Canada (and subsequently, Bank Prime rates) but we can’t say for sure when. The next Bank of Canada meeting is on September 6th. You can follow me on Facebook or Twitter for instant updates but stay tuned for another post in September.
If you would like to discuss how the changes in Prime Rate impact you OR you would like to secure a rate hold pre-approval, please do not hesitate in contacting me at 780-863-0700.
Remember, call Minn for MINN-imum Stress, Maximum Service.
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