The Bank of Canada has just announced a 0.25% increase to their benchmark interest rate which now sits at 4.75%. Many economists had predicted this increase leading up to the announcement. This increase comes after two consecutive stays in rate announcements (March 8, 2023 and April 12, 2023). Overall, it is the ninth rate increase we have seen now since the first hike back in March of 2022.
This will push the prime lending rate from 6.70% to 6.95% at most lenders. Note, TD has a different prime that will go from 6.85% to 7.00% - it's complicated!
What is the impact of the increase to my variable rate mortgage?
The 0.25% increase will increase your mortgage by approximately $15 for every $100,000 that you owe. As an example, if your mortgage balance is $525,000 that would be $30 x 5.25 = a $78.75/month increase to your payment, or $39.38 if paying bi-weekly.
What are the key points from the announcement?
As per their announcement today, “CPI inflation ticked up in April to 4.4%, the first increase in 10 months, with prices for a broad range of goods and services coming in higher than expected." "The Bank continues to expect CPI inflation to ease to around 3% in the summer, as lower energy prices feed through and last year’s large price gains fall out of the yearly data. However, with three-month measures of core inflation running in the 3½-4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target." "Governing Council decided to increase the policy interest rate, reflecting our view that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target."
There were no outlook provided about the status of rates going forward.
You can read the full Bank of Canada release here.
When is the next rate announcement?
The next Bank of Canada announcement is on July 12, 2023.
Should you convert/lock in to a fixed rate?
While you do have the option to “lock in” to a fixed rate, the rate your lender will offer you will be dependent on the remaining term of your mortgage and what their current rates are for that term, which could be lower than your current variable rate. However, in come cases the actual amortization may prevail. You would need to get in touch with them directly to confirm.
Depending on the time left on your mortgage, you may also have the option to go with a shorter fixed term til rates settle again.
What can you do going forward?
If you are comfortable to increase your current payments that would be a suggestion to reduce the impact to you in the long run. Your mortgage does allow for this. By doing so, you would be paying off more of the principal as 100% of any payment increase goes towards that and not to interest. Also, If you are paying weekly or bi-weekly, you can ask your lender to change your payments to monthly, which would save you from making a couple payments per year.
If cash flow and making the payments is a concern, we could look to consolidate any other high interest debt you may have into a new mortgage so that you have a lower rate compared to credit card, loan or line of credit interest - and in many cases a lower monthly overall payment.
What can I do if I am finding it difficult to manage my increased payments?
If you are paying weekly or bi-weekly, you can ask your lender to change your payments to monthly, which would save you from making a couple payments per year. I only suggest this if your mortgage has an adjusting payment. If you are in a static payment variable and request this change, it may trigger you needing to pay the full current amount.
Depending on the amortization remaining on your mortgage, there may also be an option to refinance your mortgage to a longer amortization which in turn can lower your payments. This option would increase the time needed to pay it down but help out with a lower payment for now. You can then go ahead and increase your payments when comfortable to do so, if you wish. This will mainly apply if you started with a 25 year amortization, and we can look to go to 30 years, or even longer with some alternative lenders. It would require to re-qualify the mortgage and there would be a penalty to exit your current mortgage. We can include this penalty in the new mortgage so it's not paid in cash.
My current mortgage has a static/fixed variable rate payment, what is the impact?
As difficult as it may be financially, I do suggest to manually increase your payment to what is possible based on your situation. This change would need to be requested directly with lender. VERY IMPORTANT - if you are going to make an increase now, be sure to make it via the LUMP SUM privilege, and not via the PAYMENT INCREASE privilege. If you end up doing it via the payment increase privilege they will set the new payment to what is should be based on your amortization which would be a big increase. If you make it via the LUMP SUM, then they won't change the base payment, but just apply the lump sum towards the principal. Please contact your lender to confirm.
You may hear from your lender if the payment you are making is just paying interest ( trigger rate ), the lender may require you to make additional lump sum payments so that there is a principal reduction. This "trigger rate" would be in the mortgage documents you signed at notary/lawyer office and they should have provided you with a copy. Also, if you are not making additional payments, the amount owing will be added to your balance, which can result in reaching the "trigger point". This is when your balance passes the original amount you borrowed. Furthermore, at renewal time, the payment then would be based on a higher balance with a lower amortization. This could result in a higher default payment at renewal time.
If we are looking to buy, will my approval amount change?
Yes, as rates go up, the stress test required to qualify for a mortgage will also increase on the variable side. This means that due to a higher payment, the qualifying amount will lower. Fixed rates are lower in many cases, and you would be able to qualify for a higher amount, if needed.
If you have any questions please don’t hesitate to contact me or reach out to my Mortgage Expert Partner Zaheed Valli-Hassam
Senior Mortgage Broker | City Wide Mortgage Services
2020 Canadian Mortgage Broker of the Year
2021/2023 Canadian Mortgage Broker of the Year - Finalist
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P: 604-671-5593 | W: zaheedvh.com | IG: @vhmortgage