Bank Of Canada Interest Rate Increases: Top Five Things Every Borrower Should Know
It’s been a couple of COVID years, but the Bank of Canada has started to increase interest rates after nearly two years of historic lows. Many people are now encountering difficulties as a result of this decision, from regular Canadians to financial professionals who are finding the changes very much challenging.
If you’re one of them, you can rest assured that I’m here to help you understand the top five facts every borrower should know about Bank of Canada interest rate rises. Keep reading to learn more about them.
1. Interest rates are still historically low
Any rate increase can feel jarring, but it’s important to remember that we’re still experiencing some of the lowest interest rates in history. While some sound the alarm any time there’s an increase, things aren’t as drastic as you may think. In fact, over the last thirty years, average interest rates have been much higher than what we see now. Yes, rates are increasing. But considering the history, don’t be too alarmed. Stay Calm and Mortgage On™️.
2. Variable rates may not change the exact amount as the Bank of Canada does
It works like this: when the Bank of Canada raises its rates, banks typically follow suit by raising their Prime Rate. But they’re not required to follow the Bank of Canada. For example, if the Bank of Canada raised rates by 0.25%, Prime Rates might only increase by 0.15%. It may not be a one-to-one change, so check the most recent Prime Lending Rate from your lender and Stay Calm and Mortgage On™️.
3. Variable rate mortgage payments might change depending on the lender
For some lenders, a borrower’s payment amount stays the same when interest rates increase because they have a Variable Rate- fixed Payment mortgage. In uncertain times, reliable mortgage payments can provide some comfort for borrowers. It can be a big relief to know that their regular budget won’t be upended by Bank of Canada interest rate announcements. They will be repaying less principle and more towards interest from each payment than they were before, but for many, it’s an easy and attractive trade-off.
Other lenders use what is called an Adjustable Rate mortgage and the clients with these will see their payments increase. This is the same as a Variable Rate in principle; however, the lender will increase a borrower’s mortgage payment amount to match changes to their Prime Rate. Higher payments keep the borrower’s repayment schedule on track, though there’ll be an impact on their regular monthly budget as their payment will increase to maintain the amortization.
It’s a small but important difference for clients who are looking to either maintain a set payment amount or a repayment schedule. Stay Calm and Mortgage On™️.
4. Canadians are paying a serious premium for fixed rates right now!
Did you know that fixed mortgage rates aren’t tied to the Bank of Canada or Prime Rates? They’re based on bond markets, and bond rates have risen sharply in the last six months.
Remember, you could be paying extra for the certainty of a fixed rate and the mortgage qualifying currently would be the fixed rate plus 2% as that is higher than the benchmark qualifying rate of 5.25% that can be used for most variable-rate mortgages. This lowers the borrower's borrowing power. For the best of both worlds, you may want to consider flexible mortgages that allow you to divide the debt into fixed or variable portions. Borrowers should also consider a variable rate so that the markets can have a chance to settle from the current exterior international influences that are impacting markets. When clients have some rate certainty and flexibility, they’ll typically find themselves in a good spot as rates adjust in the coming years. It is all about having thorough information to work from. Stay Calm and Mortgage On™️.
5. Folks renewing their fixed-rate mortgages could be in for some sticker shock
While Canadians are paying a premium for fixed rates, they’re still historically low. But if you are renewing a fixed-rate mortgage, you may be in for a bit of sticker shock compared to five years ago. This is where working with a Licensed Mortgage Broker like myself can make all the difference. With my guidance, I will ensure you have the most thorough information and details you need for this most important decision. Your mortgage choice will impact you and your family’s future wealth, and I want to ensure you can continue to cause and create that future wealth for you and your family. Stay Calm and Mortgage On™️.
There is much to consider, whether it is to lock in a portion of your debt at a fixed rate while still being able to adjust your payment on a variable-rate portion or choosing a single rate for 100% of the mortgage. A conversation with a licensed mortgage broker will go a long way.
Things are changing for Canadian mortgages, so keep checking this blog, my website, and social media channels for news and information that can help you succeed. Stay Calm and Mortgage On™️
If you’re looking for a licensed mortgage broker and agent in Calgary, Alberta, reach out to Keith Uthe Demystifying Mortgages. As an Independent Mortgage Specialist with Mortgage Alliance Enrich Mortgage Group, Smith Manoeuvre Certified Mortgage Professional, and a Legacy Certified Financial Life Planner in Calgary, my daily objective is to fulfill my personal life vision that ‘Everyone is Living a Life of Abundance.’ My goal in every conversation or interaction that I have is to impact that person’s life in a way that could help them create a financial life by design so they can move towards a life of abundance.
I provide first-time homebuyer mortgages, mortgage refinances, switch or transfer mortgages, debt consolidation mortgages, equity mortgage lending, construction mortgages, commercial mortgages, business financing, private lending, rental property financing, renovation financing, flip financing, spousal buyout mortgage, and Smith Manoeuvre mortgages. I serve clients in Alberta and coast to coast across Canada.