The Bank of Canada recently raised the prime lending rate from .75 percent to 1 percent which has economists speculating that the season of historically low interest rates may be coming to an end. This is the second rate hike by the Bank of Canada since July 2017 and there may be more on the horizon. This increase has a direct impact on interest rates as lenders use that benchmark rate to set interest rates for mortgages, loans, credit cards and lines of credit. The Royal Bank of Canada was the first to respond by raising their prime interest rate from 2.95% to 3.2% and this was quickly followed by other Chartered Banks and mortgage lenders.
What does this mean for Canadians who have mortgages or who are hoping to get one soon?
Consumers with variable rate mortgages, which are also referred to as adjustable rate mortgages, will feel the increase right away as the interest rate on variable rate mortgages fluctuates with prime rate throughout the mortgage term. For example, if the contract rate on your mortgage is Prime – .60, your interest rate will now be 2.6% (up from 2.35%). So if you have a mortgage of $480,000 with a 5 year term and a 25 year amortization, your payment will increase from $2117.28 per month to $2177.61 per month, which is a difference of $60.33. If prime rate rises by another quarter percentage point, the interest rate would rise to 2.85% and the payment will now be $2238.94. What a consumer needs to understand is the compounding effect (the total payment increased by $121.66) and what you can manage as you look to the future.
Fixed rates for a 5 year term range from 3.04% to 3.24% so these are still higher than the variable interest rate in the above example. If you find that the concern over rising interest rates keeps you awake at night, then you may want to consider locking into a fixed rate term. If you are planning to sell your home before your term is up and pay off your current mortgage loan, one benefit of staying with a variable rate mortgage is that the payout penalty is relatively low (typically only 3 month’s interest), which can be far less than the payout penalty on a fixed rate mortgage.
Home Owner Lines of Credit (HELCO’s) are similar to variable rate mortgages. Consumers who have HELOC’s will also be impacted as the interest rate fluctuates with the Lender’s prime rate.
If you have a fixed rate mortgage you will not be affected until your mortgage comes up for renewal. However, it is good time to start planning now should the interest rates be higher at renewal and prepare for the possibility that your monthly mortgage payment will be higher.
If you are in the market to purchase a home it is imperative to take a prudent look at what you can afford for a mortgage payment. Additionally, it may be beneficial to apply for a mortgage preapproval as this would guarantee the current interest rate for a period of 90 to 120 days.