As widely expected and projected by many industry analysts for the past month and a half, the Bank of Canada raised their key interest rate by another 0.50% this morning. To many who have been following the news, this comes as no shock; however, even those who were expecting it are still feeling somewhat perturbed by this rate hike. After all, the rising cost of, well...everything is now hitting our mortgages and household debt.
Before you panic, it's important at this time to keep a level head and to put everything into perspective. How WILL this ACTUALLY affect your mortgage?
~ For those of you with Fixed Rate mortgages, today's Bank of Canada rate increase will not affect you at all. Your rate and payment will stay the same.
~ For those of you with Variable Rate mortgages with static payments, your payments should remain the same. However, the amount of your mortgage payment that goes towards interest will increase, while the amount of your payment that goes towards paying down your principal amount of your mortgage balance will decrease. If you would like to stick with your original amortization schedule (ie. the original plan on how long it will take you to pay off your mortgage), I would recommend that you contact your Lender to ask them to increase your payment accordingly. Please see below.
~ For those of you with Adjustable Rate mortgages (sometimes called Variable Rate mortgages with Non-Static payments), your payment will change based on the 0.50% increase to Prime Rate. The change in your payment will likely come next month on your next month's payment date, or may come sooner for some Lenders, depending on your payment frequency. Your Lender will likely send you a notice to let you know what your payment change will look like.
- To put it simply, your mortgage payment will likely rise approximately $26 for every $100,000 of your mortgage balance (based on a 25 year amortization). On a $500,000 mortgage balance, that will be an increase of around $130 per month.
- If you've been applying my suggest strategy for the last few months/years and have been putting aside the monthly savings that you would have paid if you had chosen a fixed rate, you likely will have a sizable slush fund to pay for this increase.
- If this amount sounds like a lot to swallow, it is important to REMEMBER how much money you have been saving over the past few months and years! The strategy with variable/adjustable rate mortgages is a LONG GAME. Interest rates may rise and fall over the course of your mortgage term and, historically, the variable rate mortgage holders have always won the Rate Game.
It's important to note that, despite the increase to Prime Rate today, Variable/Adjustable Rate mortgage rates are still much lower than those of Fixed Rates mortgages today. They also offer much more flexibility (ie. smaller penalties) than Fixed Rate mortgages. As such, I do not believe that now is the time to panic and it is certainly not the time to lock into a 5-year Fixed Rate mortgage product at 4.5-5%.
If, as many people believe, we are heading into a recession and rates begin to drop again, those of you with Variable/Adjustable Rate mortgages will have the opportunity to break your mortgages and secure a lower rate.
Remember, we knew that the ultra-low rate environment would not last forever.
- We also know that an ultra-high rate environment will not last forever, either.
If you're unsure about what type of mortgage you have and how today's rate increase will affect you, reach out to your Mortgage Broker or Lender!
Any further questions? I'm happy to help! Please do not hesitate to reach out.
---> And, yes....I still have two variable/adjustable rate mortgages of my own and, NO, I will not be locking into a fixed rate at this time! Keep calm, and ride the wave with me...
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