What does this mean for variable rate mortgage holders?
Today, as widely expected, the Bank of Canada increased their overnight rate by 0.25%. Lenders are expected to follow later this week increasing their Prime Lending Rates accordingly – Prime Rate increasing from 2.45% to 2.70% (TD Mortgage Prime would move from 2.60% to 2.85%).
What does this mean for you?
Scenario 1: You have a variable “non-adjustable” mortgage (VRM)
In this scenario your mortgage payment will remain the same, however, a higher proportion of each payment will go towards paying interest vs. principal. The net impact is an extended amortization (total amount of time to pay off your mortgage will be longer).
What can you do? As variable rates remain well below fixed rates, you could keep everything the same and continue with the same monthly payment. Alternatively, you could increase your mortgage payment to ensure you remain on pace with your current amortization schedule. For questions on your payment strategy, or to review potential pros/cons of converting your current VRM into a fixed mortgage, please reach out at any time.
Scenario 2: You have a variable “adjustable” mortgage (ARM).
In this scenario, your mortgage payment will automatically increase to ensure you keep pace with your current amortization schedule. If you would like to discuss future interest rate projections, or the potential pros/cons of converting your ARM into a fixed mortgage, please reach out at any time.
Why did the Bank of Canada (BofC) increase their overnight rate?
In its statement accompanying the decision, the Bank said: “As the economy continues to expand and inflation pressures remain elevated, the Governing Council expects interest rates will need to rise further.”
Last year’s stronger-than-expected GDP reading of 6.7% “confirms [the BofC’s] view that economic slack has been absorbed.”
That being said, the Bank of Canada also recognized areas of global uncertainty that they will be following closely: the “invasion of Ukraine by Russia is a major new source of uncertainty”, “financial market volatility has increased”, “the possibility of new [COVID] variants remains a concern”.
This is the Bank of Canada’s first-rate hike since October 2018, and it is widely anticipated the market will see additional rate hikes this year.