The one-two-punch of supply chain issues and the war in Ukraine has pushed inflation in Canada to its highest level in 30 years and spurred the Bank of Canada to move toward a tighter monetary policy. On June 1, the Bank announced a second consecutive .50% increase to its policy rate (the third increase in 2022; the first occurring on March 2nd with an increase of .25%, followed by an increase of .50% on April 13th) and signaled its intention to continue increasing rates in the short term.
The one-two punch is a combination of two blows delivered in rapid succession in boxing, especially a left lead followed by a right cross. For homeowners with variable-rate mortgages and home equity lines of credit (HELOC’s), the effects of these policy rate hikes will have an immediate impact as lenders typically increase their prime lending rate in response. Depending on the terms of your variable-rate mortgage, you may see an increase in your payment or find that a higher portion of your fixed payment is going toward interest rather than principal. Watch our short video to learn more:
After three consecutive increases, it’s natural for most Canadians to start considering fixed-rate mortgages more carefully. Even if you are far away from renewing, many mortgage contracts will allow you to convert your variable-rate mortgage to a fixed rate but it is vital to make an informed comparison between mortgage types. In a rising-rate environment, variable-rate mortgages still have significant advantages that are worth considering and taking a closer look at before panicking. The key question is how high rates would have to go to make it worthwhile taking the fixed rate today. People often prefer fixed-rate mortgages for their predictability, or what we here at Benchmark call the “Set it and Forget It” option (for three, four, or five years), but this usually comes at the price of higher rates. The spread (gap) between fixed and variable rates today on 5-year terms is approximately 1.5 – 1.75%. That means that even with the Bank of Canada signaling further rate hikes, it would take several increases to make a monthly payment under the variable-rate contract equal to its fixed-rate counterpart.
It is also uncertain whether high-interest rates will persist throughout your mortgage term. Even if you are motivated to consider a fixed-rate contract because of sharply increasing interest rates, you need to keep your eyes on the horizon as you sign with a new lender. Bank of Canada policy rates have been at or near historic lows since 2008. As the graph above shows, when the Bank raised rates aggressively, as it did in 2018, these hikes have been short-lived. When the Bank raised rates in April, it also projected that inflation would begin to ease in 2023. Before locking into a fixed-rate contract, it’s worth asking yourself whether you will be paying more for security you don’t need.
If you aren’t close to the end of your mortgage term, there may be further costs to either breaking your current variable-rate contract or exercising the option to convert to a fixed rate. If you have the option to convert to a fixed-rate under your existing contract, you may be charged a fee to do so. Moreover, your current lender may not offer you the best-fixed rate, tempting you to shop around for a better deal. If you find one, you may pay a steep penalty for breaking your current contract to grab that deal. How much money will you save over the balance of your existing term? Well, we can help with that calculation! Schedule a time to chat with someone on our Edmonton Mortgage team here: Let’s Talk!
If you are in a variable-rate mortgage and anticipate higher rates, but aren’t ready to switch to a fixed rate, you can still take steps to protect yourself. Consider increasing your payments, if your current mortgage allows you, to the level they would be under a fixed-rate contract. Your larger payments will chip away at your principal, building a financial buffer against future rate increases.
If you have a fixed-rate mortgage, the rate increases that have happened and may happen in the future largely don’t affect you with the recent Bank of Canada announcement, other than the consideration around your renewal date. If you are renewing your mortgage soon or thinking about purchasing in the coming months, it may be worth reaching out and having a call with our Edmonton Mortgage Broker team to discuss your options and consider various scenarios. This way we can make sure you’re benefiting from the best possible monthly payment and a proper mortgage strategy for the future.
So now the obvious question becomes “Should you “lock-in”? Watch this short video:
If you lock in or convert, you’ll be getting a new mortgage with a fixed rate and new terms. Locking in does not necessarily secure your existing rate. You will be offered a new fixed rate with a term equal to or longer than your existing mortgage term. Remember: Fixed-rate mortgages also come with a much larger penalty to break your mortgage (up to 900% higher)! Your mortgage shouldn’t keep you up at night. If you’re still feeling uneasy, please contact us to review your options.
What it means:
- Variable-rate mortgages or home equity lines of credit (HELOC): You may or may not see a monthly payment increase. Your lender may increase your payment by $24 per $100,000 mortgage or more of the payment will be allocated to the interest, instead of the principal. Your lender will communicate any increase and the effective payment date. TIP: For some lenders, your payment will not change. Increasing your payment voluntarily is a good option if paying your mortgage off faster is a goal for you.
- Adjustable-rate mortgages: You will see an increase to your mortgage payment of about $24 per $100,000 mortgage. Typically, the payment increase comes into effect following your upcoming payment, however, it varies by lender. Your lender will communicate any increase and the effective payment date.
- Fixed-rate mortgages: Your mortgage payment will not change since these products are not tied to the prime rate and aren’t affected. We can expect the Bank of Canada to continue hiking rates until both inflation AND expectations of future inflation come back in line with their 1-3% target. At this point, barring a significant shock to the economy, it looks like a few more rate hikes by mid-2023 are likely. Another reason why working with an Edmonton mortgage team, like Benchmark, can help ensure that your mortgage plan works not only for today’s rates but for what is expected to come in the near future.
As always, a great way to begin navigating a higher-rate environment is a review of your situation to determine your best course. Whether you’re ready to make a change, or just want to discuss your options inside your current contract, a short conversation can give a big boost to your confidence. Plus we back it up with our unique Benchmark Promise. Believe in Better®
Oh, and one more final thought. The Bank’s press release today closed stating “it is prepared to act more forcefully if needed to meet its commitment in achieving its 2% inflation target.” Until then, we all await the Bank of Canada’s next scheduled policy announcement on July 13, 2022.
Source: Bank of Canada
Read the Bank of Canada Full Press Release Here: Bank of Canada increases policy interest rate by 50 basis points, continues quantitative tightening
We establish meaningful long-term relationships with clients and help them achieve financial freedom faster with diverse and customized mortgage options. The term “benchmark” originates from the chiseled horizontal marks that surveyors made in stone structures as an established point of reference.