Perspective on BoC Announcement 12/07/2022
***UPDATED December 7th, 2022***
Majority of banks have now started increasing their Prime Lending Rate by the same 0.50% amount The Bank of Canada has increased their overnight target rate by this morning. With TD Bank previously 0.15% higher at 6.10%, they will now have a mortgage Prime Rate of 6.60%. Everyone else who was at 5.95%, will now have a Prime Rate of 6.45%. Below is our original email sent out after October's rate changes, with an updated perspective on rate hikes in general, taking into consideration December's meeting and examples on how these new changes will impact payments.
Who the BoC is and what they are announcing As you may or may not know, the BoC (Bank of Canada) comes out 2 times a quarter (8 times a year) and provides their outlook on the Canadian economy and updates any changes to their policy, most importantly, the Target Overnight Rate. The Target Overnight Rate, which currently sits at 4.25%, is essentially the interest rate that commercial banks borrow and lend funds off of on a one-day basis to each other. When the Bank of Canada increases the Target Overnight Rate, that increased cost is passed onto consumers through increases to the Prime Lending Rate banks keep. This is also a major tool in managing inflation within our country. Generally speaking, a banks Prime Lending Rate increases and decreases in lock step with the Bank of Canada Target Overnight Rate. So, with the BoC increase to the Target Overnight Rate by 0.5% to 4.25% on December 7th, 2022, lenders have now started increasing their Prime Rate by the same 0.5% to 6.45% and 6.60% for TD Bank. What does this mean for borrowers? Before this most recent change, most borrowers would have had a net variable interest rate of around 5.25%, most at Prime (5.95%) - 0.70%, on average. For a $400,000 mortgage at previous 5.25% net variable, your monthly payments would have been $2,396.99 on a 25-year amortization schedule. Should you lock in? If we take the same scenario above, a $400,000 mortgage with a change in interest rate from a net variable of 5.25% to 5.75%, an increase of 0.5% to the banks Prime Lending Rate, your monthly payment would increase from $2,396.99 to $2,516.43; $119.44 Some lenders have ARM (Adjustable Rate Mortgages) and some have VRM (Variable Rate Mortgage). The VRM mortgages do not increase in payment, what they do increase by is length of time to pay off. If you want your payments adjusted to stay on top of your repayment schedule, you will need to notify the bank you wish to have your payments increased. ARM will do this automatically. What are you locking into? If you did not want to be on the variable interest rate rollercoaster anymore and decided to lock in, you would need to contact your current lender and request that change. What they will offer you is an equivalent fixed rate term for the remaining time you have left on your existing term. For example, if you were 2-years into a 5-year term, they would offer you a 3-year fixed rate. Most lenders right now have 1-year to 5-year fixed interest rates around 5.44% - 6.04%. That would have the possibility of decreasing rates on a $400,000 mortgage from current net variable rates of 5.75% by close to $75 or increasing them by possibly $70 depending on your remaining term. Right now would be a tipping point for many. If you lock in, you are guaranteeing no more increases to your payments and when looking at current 5-year terms, with the possibility of lowering your payments slightly. However, as we have been saying all along, you are also guaranteeing no more potential decreases and therefor a potential loss of savings. According to many "experts", this is the final increase for a substantial amount of time. With inflation slowly starting to show signs of being affected by these increasing rates, 2023 and 2024 will be interesting to see in relation to where these rates go. If you have not locked in your rate to date, this is likely to be the worst of it (or close to it) and if you are managing the increased rates, it might make sense for you to hold on so you have a chance at seeing the potential decreases you've been betting on over the coming years. Please also keep in mind, you may also be giving up your ability to have your mortgage penalty only be equivalent to 3-months worth of interest, regardless of your mortgage size and when you pay it out- a massive benefit for people who do not know what the next 1-3 years is going to bring them. If you wanted more perspective, please read Dominion Lending Centres Chief Economist Dr. Sherry Cooper's media release on the December 7th, 2022 Bank of Canada meeting here. We are always more than happy to discuss individual's specific situations, never hesitate to reach out to us with questions on your mortgage! Sincerely, Administration Oake Mortgage Powered by Dominion Lending Centres Producers West firstname.lastname@example.org 778-237-4876 (Ryan) 604-816-6242 (Kevin)