Last Wednesday the Bank of Canada announced an increase in their overnight lending rate by .25% taking it from .50% to .75%. This is the first increase in the past 7 years. The rationale here was that economic growth projections are higher than previous ones and this was a way to temper inflation. The banks were quick to jump on the bandwagon and have increased their prime lending rates by the same amount – to 2.95% from 2.70%. It is interesting to note that while increases seem to flow through to the banks instantly, the two last previous changes to the Bank of Canada rate (reductions of .25% each time) were met with not only a delay in the banks reacting, but also a smaller reduction in prime (they reduced prime by .15% each time). This phenomenon is good for shareholders and executive bonuses but not so good for borrowers. The immediate effect is that anyone with a variable rate mortgage or any borrowing that is tied to prime (lines of credit and certain loans) will see an uptick in their borrowing costs. To keep this increase in perspective, it is very important to note – a $100,000 mortgage with a 25 year amortization will see a change of about $12/month in the payment amount. We are nowhere near “sky is falling” territory. Variable rate mortgages are still cheaper than their fixed rate cousins.
While the Bank of Canada stated that they expect further increases as early as the end of 2017, they also stated this would be “data dependent” meaning if the economic growth outlook changes, their path will change. Interesting to note that Janet Yellen – Chair of the US Federal Reserve System – said last week that she thinks the US should slow down rate increases and that the maximum rate they would like to get to is lower than previously thought. Many people are asking if this is the time to pull the trigger and convert their variable rate mortgage into a fixed rate. It is certainly a good exercise to look at the difference and ask your mortgage provider exactly what rate they would give you if you convert. But before making any final decisions, I recommend we review all your options to ensure you make the most informed choice for your individual situation/financial goals. It is also a good time to think about any other borrowing needs you have and consider refinancing now as it may be cheaper in the long run, particularly if you are thinking about switching from variable to fixed. Give me a call at 647-893-2535 or email me at [email protected] so I can help with the math! Bottom line – don’t react without getting proper advice from an independent mortgage professional. Sign Up Here for Monthly Mortgage Updates
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