On the sidelines. Sitting by powerlessly, observing your beloved team get hammered by the opponents. Whether you’ve participated in games of any kind as a player or a spectator, you know how it feels. Shock, confusion, disbelief, anxiety, helplessness, and even anger over the loss is normal. Any range of emotions is understandable and even experienced outside of sports. For instance, the Bank of Canada announcement that its overnight interest rate, (also called the policy interest rate), is increasing for the sixth time this year by 0.50%.
The latest increase by the Bank of Canada means your lender’s prime rate will increase. For a variable rate mortgage that’s approximately an additional $29 per month for every $100,000 of your mortgage. When the cost of living increases, so does concerns over mortgage payments, other debts, and the potential for additional rate increases, its no wonder many Canadians feel like they are simply on the sidelines left to watch and deal with the onslaught of a paycheque that no longer stretches as far as it once used to.
As many have already come to realize, when the Bank of Canada announces a change to its policy rate, in an effort to keep inflation in line, it also has an impact on other loans too, such as variable or adjustable rate mortgages, and home equity lines of credit. This will place the Prime lending rate now at 5.95%. Of interest (no pun intended), the last time the Prime rate was near 6% was back in December 2007, nearly fifteen years ago.
Where do we go from here? Obviously, nobody likes to watch from the sidelines when they have a stake in the game being played. The irony of it is, for those who already have a mortgage and for those seeking to obtain one soon, you are not simply waiting on the sidelines. You may not be able to do much with the global developments of higher energy prices, or supply chain shortages, but make no mistake, you are in ‘the game’ and are likely to experience very real repercussions as a result of higher interest rates. Variable-rate mortgages and lines of credit will see payment increases. Fixed-rate mortgages, which we’ve explained in previous posts are based on the bond market (i.e. Mortgage Projections for 2022, Are Fixed Rates Skyrocketing, and Where are Interest Rates Headed) have already been trending upward. Although, if you have a fixed mortgage, you aren’t affected until it’s time to renew. That being said, it’s become more important than ever to come up with a game plan now no matter what type of mortgage product you have to ensure you’re not “stuck” with whatever happens at renewal time.
“Plain and simple, high inflation feeds frustration and creates a sense of helplessness. We want an economy where households and businesses don’t have to guess where inflation is going to be. We want an economy where the money Canadians earn from their hard work keeps its value.” – Tiff Macklem Speech (October 6, 2022)
Sometimes unforeseen circumstances such as recovering from lost wages during the height of the pandemic, and yes, even the impact of inflation can affect your ability to make your regular mortgage payments. It can be tempting to want to nod, smile, and ignore the mounting debts due to higher interest payments, but to pretend the financial problems will go away and try to conceal the debt problem for as long as possible is never the best strategy. With early intervention, there are tools and options available that can help you fight payment difficulties! A mortgage lender doesn’t want to see their customers struggle or worse, default on the mortgage; they’d much rather help homeowners find a way through the challenges they may be facing.
Here are some potential solutions our Edmonton Mortgage Broker team thinks you should consider:
1. Ask us about converting your variable-interest-rate mortgage to a fixed-rate mortgage to protect you in the event of continued increases in interest rates. With the recent hike, your new rate is probably still less than the current 5-year fixed rates, but if it’s going to keep you awake at night, or the extra dollars are going to be hard to find in your budget when another increase occurs, then let’s talk about your conversion options.
2. Ask us about shorter-term mortgages, like 3-year fixed options which may give you more flexibility once inflation is more under control in the future. Should fixed rates drop, and the market shift lower during the mid-term of your mortgage, the last thing you want is a painful penalty to get out early to take advantage of lower rates. Since not all lenders calculate mortgage penalties the same way (and the differences can amount to thousands or even tens of thousands of dollars), we can help explore which lenders have a cost-effective option to get out. Check out our video: Avoiding Mortgage Handcuffs.
3. Ask us about an early mortgage renewal. If your mortgage is coming up for renewal in 2023, now is the time to discuss your options. Don’t feel rushed or pressured, it’s important not to panic. Although we do recommend a healthy sense of urgency coupled with a strategic well thought-out mortgage plan comparing renewing the mortgage now vs. waiting. This is sure to highlight risks and potential rewards.
4. Ask us if now is the right time to purchase. Our advice is always the same: buy when you are financially ready. Don’t jump the gun just because rates “may” go higher. But by all means, if you’re thinking about buying, it’s important to have a pre-approval and a rate hold secured so that you’re maximum purchase amount stays in tact and is protected from any further rate increases while you search for a home.
One final word of caution from today’s press release:
In summary, high inflation has put significant pressure on the Bank of Canada to act aggressively. With a higher number of Canadians having variable debt products as of the second quarter of 2022, than during the previous rate hike period of 2018, the impact of these rate increases will be more visible by the end of the year. If the recent news has you concerned, it’s time to look at your whole financial picture. Take this into consideration with your overall stress level. How does the prospect of future increases make you feel? Avoid mortgage letdown. Get Benchmark Mortgages working for you. Let’s talk.
Mark your calendars: The next Bank of Canada meeting is Wednesday, December 7th, for news on further policy interest rate announcements. Or just check back right here on our website and our Highly Reviewed Edmonton Mortgage Team will post all the latest details to ensure you have the best chance at making informed decisions with all your real estate financing needs.
Interested in reading more? Check out the Bank of Canada’s interest rate announcement and the release of the Monetary Policy Report.
Source: Bank of Canada & Equifax Economic Outlook
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