Mortgage Blog
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Interest Rate Announcement - Rates Finally on Their Way Up
March 2, 2022 | Posted by: Doug Neufeld
Today the Bank of Canada did what everyone expected and increased their benchmark rate by .25%. This marks the first change in almost 2 years - and likely signals that we’re close to the end of rock-bottom low interest rates that have persisted through the Covid-19 Pandemic.
This will increase the Prime rate by .25%. Increasing from 2.45% to 2.70% tomorrow.
For borrowers in a Variable Rate Mortgage this means your payment will increase about $12/month for every $100,000 you owe.
Some key take-aways from today’s announcement are as follows:
- Russian invasion of Ukraine will add to inflation around the world.
- Economic growth is much stronger than expectations, at 6.70%, and “economic slack has been absorbed”.
- Persistent elevated inflation & price increases have become more pervasive.
- “Interest rates need to rise further.”
- Housing market activity remains elevated.
There are no immediate expectations of fixed rates increasing. In fact, bond yields (which are a good indicator of fixed rates), remain lower today than they were 3 weeks ago. Fixed rates have been steadily increasing since the end of last summer and are now already over 1% higher than they were 6 months ago – so we’ve already seen a considerable rise on long term fixed rates, while variable rates haven’t moved.
For those in variable rates the 3 questions to consider are the following:
- 1. How quickly will rates rise?
- 2. How much will rates rise?’
- 3. If I lock my mortgage into a fixed rate, how much higher will my rate be than I’m currently paying?
Unfortunately, there’s no “one size fits all” answer to variable vs. fixed. Everyone needs to look at their own personal situation if they’re in a variable rate mortgage
- What’s your risk tolerance?
- Can you afford higher payments?
- What is your current discount below Prime
If you’ve already set your mortgage payment above the minimum level, you have room, and you don’t necessarily have to increase your payments when Prime increases. And if you’re in an ARM Adjustable Rate Mortgage, your payment likely won’t increase anyways. Also, if you have a large discount of 1% or more below prime, your current rate might still be in the 1.5% - 1.75% range. If that’s the case, locking in your mortgage will immediately increase your interest rate another 1.5% or more…so you have to decide whether it’s worth it for you to simply continue in variable as a long-term strategy to pay less interest and pay your mortgage principal off quicker.
Here's a key point to consider - if interest rates double - your payments only increase about 22%. For example, your $2,000 per month payment would increase to about $2,440
Most economists expect the Bank of Canada rate and Prime to increase another 1.25% by the end of this year. So Prime could be as high as 3.95% by December 2022
You can read our Senior Economist’s break-down of today’s announcement for further consideration HERE
Please keep in mind that all mortgage numbers, rates and payment affects I’ve mentioned are general and not specific and if you need to specifically discuss your situation, please reach out to me directly.
