Variable Interest Rate Mortgages – The Good, The Bad, and The Not-So-Ugly

So we see things on the news, hear them again on the radio, then (sometimes) learn another version of it all from friends, family, or random blog posts. Here’s a summary of what’s really going on.

RUMOUR – RATES ARE GOING UP, UP, UP SO VARIABLE INTEREST RATE MORTGAGES ARE SCARY:

First thing to understand? Rates don’t just go up, up, up with no rhyme or reason.

• Fixed interest rates move up or down depending on how Canada’s Bond Market is doing.
• Variable interest rates usually go up or down depending on decisions from the Bank of Canada.

Because they’re more exciting, today, let’s focus on VARIABLE interest rates.

THE BASICS:

1. A variable interest rate is actually a formula that gets locked in such as “Prime MINUS 1.0%”.

1. The “Prime” part of that formula is the part that changes with the Bank of Canada’s decisions. (Currently it’s 3.45%)

THE CHANGES:

• The Bank of Canada meets EIGHT times a year to discuss inflation, Canada’s job market, etc. The decision to change their Overnight Target Rate at these meetings is what triggers the Big Banks to then change their “Prime Rate”.
• Rate changes typically happen by increments of 0.25% each time.
• Increases (and decreases in the past) can alter the Canadian market a lot so the Bank of Canada doesn’t constantly make changes at every meeting. In fact, for years and years before 2015, there were no changes in the Bank of Canada’s Overnight Target Rate! In fact, take a look below at the trend in Canada’s Prime Lending Rate:

THE EFFECTS:

When the changes happen, some Lenders will adjust your next month’s mortgage payment amount BUT some Lenders won’t adjust your payment and will instead decrease the portion of your payment that goes to Principal and increase the portion that goes to Interest.

THE PREDICTIONS:

Variable rates are currently low, low, low. For some mortgage products, there is even a 1.0% or more gap between the fixed and variable rates. This means that the Bank of Canada would need to increase the Overnight Rate FOUR times in order to hit today’s current fixed rates.

The next increase in Prime is expected at the Bank of Canadas July 11, 2018 meeting and possibly one to two more increases are expected in the following year. Hard to say if there will be more increases to follow those but that still means you’d likely be saving a fair amount of money in the first year at least.

Of note: If you are someone who will get anxious every time the possibily of a rate increase comes up, although the rate may be higher, please consider that perhaps the stabiltiy and peace of mind from a fixed interest rate is more for you?

DID YOU KNOW

If you ever get too anxious and want out of your variable rate mortgage, you can switch over to whatever fixed rate your Lender is offering at the time with no penalty.

Or, if there are much lower fixed promos available at other Lenders, you can always consider breaking your mortgage and doing a switch because the penalty to break a variable rate mortgage is only 3 months’ interest. Not only that but a lot of Lenders will even let you add that penalty (up to $3000) into your new mortgage with them when you move over!

FUN FACT:

Did you know that the Bank of Canada publicly posts a full list online of when they plan to meet for the year??

Find it here.

They even have a handy link that lets you add the Bank of Canadas calendar to your calendar so you dont even have to manually input reminders into your calendar! (Youre welcome!)

Of course, if you dont want to clutter up your calendar and you just want to be updated with the nitty gritty, you can follow me on Facebook or Twitter.

If you have questions about variable interest rate mortgages or would like to secure a rate hold pre-approval for an upcoming purchase OR mortgage renewal, please do not hesitate in contacting me at 780-863-0700.

Remember, call Minn for MINN-imum Stress, Maximum Service.