Bank of Canada rates rise again. How will it affect you?

The Bank of Canada announced this week that they were increasing their overnight rate by 25 percentage points, the third such raise in less than a year. The rate increase also comes on the heels of last month’s announcement to hold the line on interest rates.
The bank cited economic growth for their position change: “Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity.”
In more detail:

  • The global economy continues to strengthen, with growth expected to average 3.5% over the projection horizon.
  • In Canada, real GDP growth should slow to 2.2% in 2018 and 1.6% in 2019, slight increases over previous predictions.
  • Consumption and residential investment have been stronger than anticipated, reflecting strong employment growth.
  • Business investment has been increasing at a solid pace, and investment intentions remain positive.
  • Exports have been weaker than expected although there’ve been positive signs in most other categories.

As the economy evolves in the near future, the bank expects to see consumer and residential markets contributing less to economic growth than they have been lately, being supplanted by business investment and exports.
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 from 3.2% to 3.45%.

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 in the market to buy a home, get preapproved for a mortgage and lock in at today’s fixed rates for 120 days. This will give you some short-term security while you’re looking for a home.
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.

Fixed mortgages

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. And you’ll probably feel the pain here the most, after feeling it in your mortgage.

Other credit

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.

Housing prices

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.

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