If you have watched the news in the last few days/weeks you may have seen that fixed mortgage rates have been on the rise. Also, there is news that the Bank of Canada might increase the benchmark rate. The sky isn’t falling! Rates have been historically low for many years now and most economists anticipated some upward movement in 2017 and 2018. Some people believe these low rates have caused the hot housing market in Canada (especially Vancouver and Toronto), and therefore we saw the government intervention by way of the BC Foreign homebuyers tax, tighter guidelines for First Time Home Buyers… but that’s not really the case. The main factors contributing to the movement in fixed mortgage rates: 1. Bond rates are directly correlated to fixed rate mortgages – bond yields increased from 0.959% on June 9th to 1.47% as of July 7th 2%. The price of money is directly related to the bond yields which therefore means borrowing money will become more expensive. This explains why the fixed rates over the last month have seen an increase of .20% to .30% lender dependent. Please know that while we have seen a rise in mortgage rates, they remain incredibly low. Below 3% is historically unheard of…make no mistake, we are still in an unusually low-rate environment.
How does this affect my Mortgage Payments?
Here are some examples of how minor rate increases would impact mortgage payments: A $300,000 mortgage moving a five-year fixed rate mortgage from 2.64 percent to 2.94 percent: $1,364 to $1,410. $46 more per month. On the same amount, the variable rate mortgage hike from 2.7 percent to 2.85 percent: $1,373 to $1,396. $23 more per month. For a $600,000 mortgage, the same changes in rates would increase the monthly payment by $91 and $46, respectively. For a $1 million mortgage, the same changes in rates would increase the monthly payment by $125 and $93, respectively.
If you are considering the purchase of a new property or would like to renegotiate your existing mortgage, now is a great time to look at your options!
Will the Bank of Canada Increase the Benchmark Rate
The latest rumors are that the Bank of Canada is going to increase the benchmark rate (which impacts the prime rate) on their next announcement date of July 12th, 2017. But right now, it’s a game of wait and see as they haven’t gone up in over 5 years. However, if rates do change, your new rate will go into effect August 1st, not immediately. In regards to the decision whether to choose variable or fixed, it is truly a personal decision and based on your risk tolerance. If you were to lock in, your payments would increase more than the prime rate increase at this time. I would rather increase my mortgage payments and put more towards my balance than to pay interest to the bank. If you are struggling to make up your mind between taking a fixed rate or going variable, why don’t you give me a call, text or email. I would love to share a strategy with you that allows you to take advantage of the variable rate while gaining some of the security of a fixed rate.
I recommend that you call me if you’re planning to lock in. 2/3 mortgage holders break their mortgages before the term is up and variable rate mortgages still carry the lowest interest penalties.
The Overnight Lending Rate
The overnight lending is correlated to the prime rate which is currently 2.70%. The last increase in the prime rate was 7 years ago. What are key determinants in the Overnight lending rate you may ask? – Economic Growth – The Central Bank Policy – Liquidity Who does it effect? – Employment – Economic Growth – Inflation What does the Overnight rate do? – The rate at which financial institutions or central banks charge one another to borrow money overnight. – The amount banks have fluctuates day to day, which may result in a shortfall or surplus they often lend money to one another to keep the system stable and liquid.