It’s been approximately 24 hours since the most recent Bank of Canada Prime rate increase announcement.

As expected on October 24th the Bank of Canada increased their overnight rate up by 0.25% to 1.75%.

Bank Prime was previously sitting at 3.70%. With this most recent increase Prime rate is now 3.95%.

WHAT does the CRYSTAL BALL SAY?

The Bank of Canada certainly seems to be in the mood to increase rates. In saying that – those of us that watch the market and mortgage rates daily were anticipating and discussing this October 24th increase with our clients. It did not come as a surprise.

Many factors including elevated levels of house hold debt (credit cards, lines of credit, car payments etc.) and other national and global matters will continue to impact the decisions that we will be seeing from the Bank of Canada through to the end of 2019.

Nearly every economist has a slightly different prediction on what we will see in the near future. There are many factors that the Bank of Canada will continue to monitor when making these decisions.

Will your mortgage rate be higher on your next renewal than it was for your last term? Likely it will go up.  We have been spoiled in the last 10 years with all time low rates.

The positive: increasing rates mean that our economy is strengthening.

I know that many of us are not feeling this in our own households.  That is where the elevated household debt levels come into play.

My most valuable piece of advice is to review your spending and your unsecured (credit card, line of credit) debt. Work towards paying off the high interest and high payment debt that you have accumulated.

Do you have EQUITY in your home?  We have successfully helped hundreds of clients consolidate their unsecured debt and reduce the overall pressure of monthly payments and higher payments.

 

Mortgage Rates are increasing… hype

Have we seen increases recently to rates? We most certainly have. Will we see further increases?

We likely will. In saying that, we are still seeing historically low mortgage rates well under 4%.

We have been having this same conversation for years.  Previous rate scares would have clients locking into terms that did not meet their short term or long term financial needs.

It is very important to remain cautious in getting caught up in the most recent headline or news broadcast.  I ask that if you have questions relating to your individual mortgage to reach out to me at any time.

Fixed VS Variable?

The conversation is very different with every client. A fixed rate may be what you are simply most comfortable with. A variable rate comes with some level of risk but depending on your equity and the discount being offered there can certainly be long term benefits.

Pro vs Con : Variable Rate mortgage

Variable rates ‘historically’ have saved consumers the most money in interest.

A Variable rate is much like an investment. There are hills and valleys and flat times.

We have seen deeper discounts on the Variable rate mortgage products in the last year than we have seen in 10+ years. Those discounts as low as 1% off Prime or better. This gives most Variable rate clients quite a cushion and pillow to withstand and to consider going into the next 12-24 months.

If we have discussed variable rate options in the last 12 months- we have discussed structuring a plan and a Variable Rate Strategy.

The Variable rate strategy is simple. Get ahead of the upcoming increases, pay off your mortgage balance faster, cushion against upcoming increase: increase your regular payment to what a “fixed” rate payment would be.

A variable rate mortgage provides the ultimate discounts on rate WITH the best flexibility. Knowing that at any time a variable rate can be paid out with 3 months interest penalty is certainly a benefit for many.

To stay or to go? Should you convert your Variable into a Fixed rate?

  • What is your discount?
  • If your discount is Prime -.60% or better you may want to consider waiting and keeping an eye on things.
  • If your discount is Prime -.50% or less let’s discuss your options for early renewal.
    • We can look at fixed rates OR variable rates with deeper discounts giving you more of a cushion.
    • Often we can solidify significantly lower rates than the lender you are with is willing to convert you into.

If you are following the Variable rate strategy, have a discount of Prime -.60% or better, are making higher payments and/or if your mortgage balance is below $300,000 you may want to consider watching the market.

Timing is everything

There is no “crystal ball” answer. We can only make the best decisions available to us it the info we have today.

If your renewal is due soon (within the next 12 -18 months) please reach out to us.

We will do a comprehensive review of what options would be best going forward.

There is no RIGHT answer. Fixed vs Variable? Lock in NOW or LATER?

We go off data, reports, and the experience of what we have seen in the past- to provide the very best advice so you can make a sound decision.

Case Study

A slight increase in rates does not equate to drastic changes to your payment.

Here is an example of a variable rate mortgage with a deep discount that we have put together in the last 12 months.

Mortgage amount: $280,248.00

Renewal

March 2018

5-year variable discount Prime -1.09%

Amortization= 20 years

Clients set their payment at $1586.46/month =”as if” they were paying a rate of 3.25% *the fixed rate that would have been offered at the time of renewal*

This assists in a strategy to pay their mortgage off at a faster pace while rates are low and avoids future payment shock with increases to Prime rate.

As of October 23: (Rate =2.61%) Payment = $1498.17/month

Increase as of October 24: (Rate =2.86%) Payment = $1532.33/month

Possible Increase + .25% (Rate =3.11%) Payment= $1566.91/month

Possible Increase + .25% (Rate =3.36%) Payment=$1601.91/month

In the scenario above. Like many that we have put together: there is significant principal balance being paid down with the increase to payments from the start, this client chose biweekly accelerated payments (which will also pay off your principal balance faster). The client is saving significant interest costs in the gaps between the Prime rate interest increases. We have also not accounted for any decreases to Prime rate within the 5 year term.

Every situation is unique. Please contact us with any questions.

Tammy Wandzura

Mortgage Broker, AMP