For the first time in 7 years, the Bank of Canada didn’t announce that they were keeping their overnight rater at 0.5%. Instead, they announced this week a rate increase: to 0.75%.
The bank cited economic growth—both domestic and international—for their position change.
Canada’s economy has been robust, fuelled by household spending. As a result, a significant amount of economic slack has been absorbed. . . . As the adjustment to lower oil prices is largely complete, both the goods and services sectors are expanding. Household spending will likely remain solid in the months ahead, supported by rising employment and wages, but its pace is expected to slow over the projection horizon. At the same time, exports should make an increasing contribution to GDP growth. Business investment should also add to growth . . .
So how does this affect you as a homeowner?
Well, Canada’s largest banks took only a day before readjusting their prime rates. Generally, they increased it from 2.70 to 2.95%.
Variable rate mortgages
Well, if you have a variable rate mortgage, your rate is undoubtedly going to rise. The nature of variable rate mortgages is that the rate adjusts according to fluctuations in the market, which is advantageous when rates drop. Not so much when they rise.
So, should you switch from variable to fixed?
Well, maybe. Variable rate mortgages often come with an option to switch to a fixed rate during the term of the loan. However, switching might trigger a special conversion rate, not the actual fixed rate, and conversion rates can be more expensive. You’d also likely have to lock in to a 5-year term at that rate, even if you have just a year left on your existing term.
If you’re not sure which options are available to you, you can phone or email us, and we can let you know what the best options are for your mortgage.
Your rate is fixed. You don’t have to worry about it at all. Well, for now.
When your mortgage term expires, and it’s time to renew, rates will likely be higher than your current rate. That being said, if your mortgage is on a 5-year term and you got it nearly 5 years ago, before interest rates dropped, you might end up being ahead for your next term.
Either way, contact us if you have any questions or concerns, and we can help you figure what your best options are going forward.
Home equity lines of credit
Most home equity lines of credit are going to go up because most of them are built on variable rates. An increase of only 1/4 of a percentage point probably isn’t going to make a huge difference, but things could get ugly if interest rates continue to rise.
It really comes down to whether you have a fixed rate or a variable rate. Lines of credit and student loans often have variable rates. On the other hand, vehicle loans typically have fixed payments, which means your monthly payment probably won’t increase, but the term of the loan could. You should talk to your creditors about how the interest rate change may impact you.
At low interest rates, potential homebuyers we more likely to take out mortgages, and with more homebuyers in the market, house prices were going up, particularly in Toronto and Vancouver. As interest rates rise and potential buyers drop out of the market, we may start to see housing rates fall, which is great for those homebuyers still left in the market.
If you need more information on how this rate change specifically affects you and your home, contact us. We’d be happy to help.