Read below for an update on the Bank of Canada’s latest update from our friend and Mortgage Broker from Mortgage Architects, Ana Cruz!
This update is geared towards those with a variable or adjustable mortgage; however, this is good information for everyone to know.
Today the Bank of Canada (BOC) met to discuss their decision on the target for the overnight rate, which affects variable rate products.
Here’s the outcome of today’s decision.
The Bank of Canada has increased the overnight rate from 1.50% to 2.50%
Here are some highlights from today’s announcement
- BOC raised the overnight rate from 1.50% to 2.5%, communicating that it is “front-loading” the necessary increases and stating that further rate increases are still a reality in the coming months.
- All adjustable (variable) rate mortgage holders will see an increase in payments. The prime rate will increase from 3.70% to 4.70%. Depending on your lender, it may be the next installment of the first installment of the following month.
- This is the biggest one-time increase to the overnight rate since 1998. As we can see, the BOC is on an aggressive campaign to raise the overnight rate and control runaway inflation which is at its highest in close to 40 years; currently sitting at just under 8%
- By making these aggressive increases, the BOC has forecasted that inflation will peak at 8% this year and begin to decline toward the end of the year and reach its target in 2024. All these assumptions are based on a global projection that oil prices will gradually decrease and our supply chain issues will ease up.
- We must realize that this isn’t just impacting Canadians; these aggressive measures are on a global scale. Close to 40 central banks worldwide have increased their rates by at least .75%. As Canadians, we have one of the strongest banking systems, and as painful as it may seem for borrowers now, this short-term pain is meant to guard us against the risk of higher inflation taking route, leading to a weaker economy. Remember, there is purpose in patience, and what goes up will come down.
WHAT DOES THIS MEAN FOR YOU?
You can expect your payment to increase if you have an adjustable (variable) rate mortgage—a few things to point out.
- Variable-rate mortgages are still close to 1%-1.5% lower than fixed-rate mortgages depending on your discount.
- If you are thinking of locking into a fixed rate mortgage – let’s talk as you will likely be locking into the highest fixed rates we’ve seen in years.
- I suggest increasing your payments (either towards a savings/house account or by making extra payments to your mortgage directly) so that you will not be in payment shock when your current mortgage is up. This is good practice if you are in a fixed or variable rate mortgage.
- If you want to discuss your options, connect with me, and we can look at your numbers….but be prepared that locking in will increase your payments as the fixed rates are about 5.09-5.59% currently for a five-year fixed rate.
SHOULD YOU LOCK -IN YOUR VARIABLE RATE MORTGAGE?I stand by my last update when I said that you should not lock into a fixed-rate mortgage now; however, the choice is always yours. All I can do is provide you with enough information to enable you to make your own decision. So here are the facts:
Depending on high-ratio or conventional mortgages, today’s fixed rates are between 5.09% and 5.59%.
Taking on a variable rate mortgage, being less than a year into it, and deciding to lock in defeats the purpose of taking a variable rate mortgage. Think of your variable rate mortgages as a diet or new way of living. You can’t expect to go on a diet for a few months and want to see results; you need to stick with the plan to measure your long-term results.
Only at the end of the term or amortization will you be able to look back and measure how you did.
For every $100,000 mortgage, you can expect an increase of approximately $55 each month.
See below in “The Numbers” section, where I break this down for you and compare the variable to the fixed rates currently.
WHAT’S STILL TO COME?
Oh, if I only had a crystal ball! No one anticipated a 1% increase, even the economists. The only certainty is that the BOC will continue its quantitative tightening in the form of further increases, as stated today. The BOC will keep doing what is necessary to achieve a 2% inflation target.Here is the link to the BOC’s announcement today and the Monetary Policy Report released today
NEXT SCHEDULED BANK OF CANADA UPDATE:
September 7, 2022
Each time the Bank of Canada meets, we will update you on the change in cost.
Here is some more information to put your mind at ease.
It’s important to note that the discounts have changed since we last updated you in June when the discounts were around prime – .50% for a 30-year amortization, and today, they are at prime – .40%
For this example, we will assume a $500,000 mortgage and a rate of prime – .40%(4.70% – .40% = 4.20%) with a 30-year amortization.Here is what the payments will look like before and after the increase today
BEFORE THE INCREASE
Payments with a rate of 3.70% – .40% = 3.30% variable rate mortgage payment of $2,184 per month
AFTER THE INCREASE
Payments with a rate of 4.70% – .40% = 4.30% variable rate mortgage payment of $2,463 per month
That’s an increase of $279. per month.
Now let’s look at that mortgage with a five-year fixed rate of 5.59% today mortgage payment of $2,847 per month.
NOW YOU DO THE MATH!
Wouldn’t voluntarily increasing your mortgage payments to pay more towards your principal make sense, or do you still want to lock in and give the bank an extra $384 each month as ‘insurance’ to know that you will not have a higher rate than 5.59%
Some of you will want that – and that’s fine!
For the rest of you, stay the course and save on interest in the meantime.