The July 2017 Rate Increase
July 20 2017 Posted by LA Mortgage Team
Understandably, the first rate increase since 2008 has caused a lot of questions so thought I write a little post...
Truthfully, we have grown accustomed to these ultra-low interest rates, it's become very comfortable and for some fairly new in the housing market, it has been their norm.
What is actually normal is a prime rate between 5-6% and fixed rates around the 5% mark. Since the 2008 financial crisis, borrowing rates dropped significantly as did our economy.
Now, the Governor for the Bank of Canada, Stephen Poloz feels that the Canadian growth is on the rebound and strong enough to warrant a rate increase by 25 bps, which bumps up the overnight lending rate, therefore banks will follow by increasing their bank prime rate from 2.70% to 2.95%. The prime rate is tied to this BoC rate and fixed rate mortgages follow the bond market.
What does this mean to you?
If you have a variable mortgage, your rate will increase by 25bps and your payment will adjust.
As an example, if you have a mortgage of $300,000, 5 year term and 30 year amortization, with a rate of 2.20%, it would increase to 2.45% which results in a payment increase of $38.08 per month.
Historically variable mortgages offer greater savings than a fixed rate mortgage which are currently at approx. 2.79% for a 5 year term.
When clients ask us 'which is better?' We explain that it really is a matter of personal preference. We cannot predict what will happen in the future and where rates will go. So we ask, what will help you sleep at night? Knowing what your payment will be over 5 years without change OR taking a potentially lower variable rate and understanding that the rate will most likely change therefore causing a payment change. If the latter scenario keeps you up at late, then a variable mortgage may not be for you. If you believe that fluctuations in a variable mortgage rate are still more favourable in the long-term, then it might make more sense for you.
No one can say when rates will increase again, or decrease? One thing is for sure, there will be changes as our economy changes and the government will always adjust rates accordingly. This came to a surprise to many since the inflation rate is also below target, so why did Poloz increase rates? I suspect it is another measure to cool the housing market. No one knows if there will be another increase at the next October meeting, I'm always asked where I think rates will go. If I only knew! What I do know is that rate changes are inevitable, when we discuss mortgage payments and a client's budget, we factor in future rate increases to ensure that payments are affordable. This is also why when someone applies for a variable mortgage, a higher rate is used to allow for future increases (4.64%).
This is not a time to worry, in fact the time to worry was when the rate was dropping and stayed flat for so many years as that is not a sign of a strong economy.
There is a lot of media coverage about this which is great for news but causes people concern and unnecessarily.
If you are uncomfortable with rate changes and payment increases, please contact us so we can ensure you are in the right mortgage product.