March 2nd, 2022

At 10am, March 2, 2022, the Bank of Canada (BoC) increased it's overnight lending rate by 0.25% to 0.5%, which was well anticipated considering inflation is running hot and has hit a 30 year high. Here is what this means for your variable rate mortgage and/or home equity line of credit:

Home Equity Line of Credit (HELOC): The Prime rate is expected to increase by 0.25% which will increase the banks' Prime rate to 2.70%. Your interest rate will therefore increase by 0.25% meaning you will be paying slightly higher interest on your HELOC balance and your minimum interest only payment will also increase accordingly. The typical rate for a HELOC is Prime + 0.5% so the rate will change to 3.20%. For every $100,000 balance on a HELOC you will be paying approximately an additional $21/month in interest.

Variable/Adjustable Rate Mortgage: The interest rate on your variable/adjustable rate mortgage will also increase by 0.25% as the banks increase their Prime rate by 0.25%. Your rate is calculated based on a discount OFF Prime rate and while your discount remains locked in, the Prime rate will increase accordingly. For example if you have a current mortgage at Scotiabank with a rate of Prime - 0.90%, your current rate will move from 1.55% to 1.80%. Please note if you are with TD or HSBC, your payment will remain static and not change. You have the option to increase your payment, if you would like, by calling your TD branch/bank. With an increase in Prime by 0.25%, this just means more of your mortgage payment will shift towards interest over principal. If you are with another lender like Scotiabank or First National Financial you will be receiving a letter or notification from your lender indicating the rate increase and an increase in your payment. Please keep in mind, for every $100,000, a 0.25% rate increase equates to roughly a $12/month increase. For example, on a $500,000 mortgage your payment will increase by roughly $58/month so please don't panic!

To give you a comparison between a typical variable rate and a 5 year fixed rate right now, the difference is about 1.50%, even with this current increase. Your rate will of course depend on when you chose the variable rate mortgage and the discount off Prime at that time. So if you are reluctant to stay with your variable rate mortgage and want to lock into a fixed rate, please keep in mind you will pay a hefty premium to do so. Essentially there would need to be another 5-7 rate increases on your variable rate mortgage in order to just get up to the current fixed rates (assuming your variable rate was ~1.50% - 1.75% as of early this morning). Also keep in mind, we do not know the impact or result of the Russia vs Ukraine conflict as of yet, bringing more uncertainty to the global and domestic economy. During uncertain times, it is typically a more favourable result for those in variable rate mortgages. Furthermore, as a result of the war, bond yields have recently dropped in which fixed rates typically follow. If bond yields continue to drop and as we get into a more competitive Spring Real Estate market, we could see fixed rates come down as well, giving borrowers a better opportunity to lock into a fixed rate at that time.

So overall, while the news is going to spread fear and your bank may call you to try and get you to lock into a fixed rate (in which they would be making more money off of you), I would stay the course and stick with your low variable rate mortgage. A 0.25% increase was expected and we always knew rates were never going to stay at rock bottom forever. As mentioned, unless you have a static payment option with TD or HSBC, a 0.25% increase only equates to an increase of roughly $12/month for every $100,000. However, if you are in panic mode (which hopefully you are not after this email) and are losing sleep over your variable rate mortgage and the uncertainty it brings, then by all means call your lender and request them to lock in your rate for the remaining term.

Moving forward, we are going to see further rate increases but if you are in a low variable rate mortgage you have the room for these increases and you are still benefiting from a much lower rate in comparison to a fixed. If your variable rate is well above 2%, then please set up an appointment with me and we can discuss options moving forward as it may make sense to restructure your mortgage.

If you are with TD or HSBC and don't want more of your payment going towards interest then I would recommend calling your lender and setting up an accelerated weekly or bi-weekly payment. This will decrease your amortization and allocate more of your payment towards principal and more frequently, resulting in less compounded interest. Changing your payment to an accelerated option will help offset any future rate increases. If you are looking to qualify for a new mortgage as in purchasing an investment property or will be closing on a pre-construction soon, then I would recommend not increasing your payment and keeping your payment as low as possible until we figure out the financing for that new property.

If you need to set up a call and discuss further, please click on the link below and we will be scheduling calls next week to discuss this recent BoC announcement. BOOK YOUR CALL HERE FOR A RATE DISCUSSION

Here is the media release today from the Bank of Canada:

"The Bank of Canada today increased its target for the overnight rate to ½ %, with the Bank Rate at ¾ % and the deposit rate at ½ %. The Bank is continuing its reinvestment phase, keeping its overall holdings of Government of Canada bonds on its balance sheet roughly constant until such time as it becomes appropriate to allow the size of its balance sheet to decline.

The unprovoked invasion of Ukraine by Russia is a major new source of uncertainty. Prices for oil and other commodities have risen sharply. This will add to inflation around the world, and negative impacts on confidence and new supply disruptions could weigh on global growth. Financial market volatility has increased. The situation remains fluid and we are following events closely.

Global economic data has come broadly in line with projections in the Bank’s January Monetary Policy Report (MPR). Economies are emerging from the impact of the Omicron variant of COVID-19 more quickly than expected, although the virus continues to circulate and the possibility of new variants remains a concern. Demand is robust, particularly in the United States. Global supply bottlenecks remain challenging, although there are indications that some constraints have eased.

Economic growth in Canada was very strong in the fourth quarter of last year at 6.7%. This is stronger than the Bank’s projection and confirms its view that economic slack has been absorbed. Both exports and imports have picked up, consistent with solid global demand. In January, the recovery in Canada’s labour market suffered a setback due to the Omicron variant, with temporary layoffs in service sectors and elevated employee absenteeism. However, the rebound from Omicron now appears to be well in train: household spending is proving resilient and should strengthen further with the lifting of public health restrictions. Housing market activity is more elevated, adding further pressure to house prices. Overall, first-quarter growth is now looking more solid than previously projectem.

CPI inflation is currently at 5.1%, as expected in January, and remains well above the Bank’s target range. Price increases have become more pervasive, and measures of core inflation have all risen. Poor harvests and higher transportation costs have pushed up food prices. The invasion of Ukraine is putting further upward pressure on prices for both energy and food-related commodities. All told, inflation is now expected to be higher in the near term than projected in January. Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards. The Bank will use its monetary policy tools to return inflation to the 2% target and keep inflation expectations well-anchored.

The policy rate is the Bank’s primary monetary policy instrument. As the economy continues to expand and inflation pressures remain elevated, the Governing Council expects interest rates will need to rise further. The Governing Council will also be considering when to end the reinvestment phase and allow its holdings of Government of Canada bonds to begin to shrink. The resulting quantitative tightening (QT) would complement increases in the policy interest rate. The timing and pace of further increases in the policy rate, and the start of QT, will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving the 2% inflation target."

As mentioned, with variable rates still remaining very low and the uncertainty around Russia/Ukraine, I would advise remaining in your variable rate mortgage for the time being unless you feel otherwise of course. If your overall interest rate is well above 2% after this recent increase, let's book a call and see how we can save you money by not paying unnecessary interest. If you are feeling stressed or uneasy in this rising interest rate environment, you can call your lender and request options to convert a fixed rate but I would also advise booking a call so we can review.

If you have any questions, don't hesitate to reach out or schedule a meeting, otherwise I will be in touch after the next BoC announcement on April 13, 2022.