Attention Variable Rate Mortgage Holders:
Do Not Panic.
The Bank of Canada raised its key interest rate by 0.25% today - just as they have been telling us that they would.
Citing uncertainty due to the unprovoked invasion of Ukraine, high inflation, and a stronger than expected first-quarter growth, the Central Bank did just as we expected.
The biggest question is..."SHOULD I LOCK IN?"
Remember: It is just a 0.25% increase. We knew this was going to happen at some time or another! It was part of your mortgage strategy.
Please consider the following:
The monthly payments on a $500,000 mortgage with a 25 year amortization and a Variable Rate at 1.50% was previously $1,999.68 per month.
A 0.25% increase in rate to 1.75% increases your payments to $2,058.95, which is a difference of only $59.27 per month. If you have a static payment variable rate, your payment won't change at all.
If you were to lock yourself into a 5-year Fixed Rate at 3.29%, an average 5-year fixed rate in the industry right now, your monthly mortgage payment would be $2,441.25. That is a difference of $382.30 per month, or $4,587.60 per year!
In addition to this $382.30 extra per month, you would be changing the flexibility of your mortgage. If you ever need to break a Variable Rate Mortgage, the penalty is just 3 months of interest (around 0.5% of your mortgage). In contrast, penalties for breaking Fixed Rate Mortgages are determined using the "Interest Rate Differential", a calculation that can be up to 4.5% of your mortgage balance!
The Bank of Canada would have to raise their Key Interest Rate SIX times before you arrived at where Fixed Rates are right now, as they usually move their rates in increments of 0.25%. It's important to keep in mind that the Bank of Canada makes just 8 rate announcements per year.
Prime Rates with the lenders will likely rise from 2.45% to 2.70% today. The highest Prime Rate has been in the last 12 years is 3.95%...only 1.25% higher than today.
I've done the calculations, and even if the Bank of Canada increases their rate by 0.50% per year for the next 5 years, you will still come out thousands of dollars ahead with a variable rate mortgage right now.
Remember, the Banks LOVE Fixed Rate Mortgages, and would love to see you locking into those fixed rates right now. The Economists that you often see quoted in the news are paid by the Banks. These same Economists have been predicting a rate increase of 1.50% or higher for over 10 years...and they have been WRONG. Historically, Variable Rate Mortgage holders have always "won" the rate game.
So...Don't panic! Keep calm, stick with your strategy, and remember that the sky is not falling.
NOW is the time to be taking advantage of this ultra-low rate environment!
Put aside that $382.30 per month into a savings account, if you are concerned about rates rising in the future, or
Use your prepayment privileges that came with your mortgage to make extra payments to pay down your mortgage balance quicker.
And CONGRATULATIONS on all of the money you have been saving!!
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