We rarely post news about the Bank of Canada (BOC) meetings. Why? Well, first, it’s incredibly boring. The powers at BOC meet eight times a year, so that’s 8 times the boring.
But more importantly, in all those meetings, they have not changed the overnight rate (commonly called the prime rate) since March 30, 2020.
So, for almost two full years, the news from the BOC has been pretty much the same. “Low rates, a good time to borrow. But, keep your eye on the next meeting! We may raise the rates!”
Honestly, how else do you keep people coming back to listen to the Bank’s announcements?
But, the day has finally come and the Bank has delivered on its eventual promise to raise rates at its second meeting of the year.
The Bank Increases Prime Rate: What Does It Mean For You
Today’s announcement wasn’t a shock to anyone in the industry.
From the price at the pump, utility bill, or that bag of oranges at the grocery store, inflation is apparent. You don’t need an economics degree to see it.
This morning, the Bank of Canada announced an increase to their overnight rate by .25%.
Update: On June 1, Bank of Canada made its third increase of the year by .50%. The overnight lending rate now sits at 1.5%.
But, let’s break it down. What does this increase mean for you…right now…today?
Prime rate will go up, and almost immediately. The Big 5 banks will start announcing their prime rate changes as early as today. Will it also go up .5%? Most likely. Sometimes the banks don’t follow the change of the overnight rate down to the decimal, but that’s usually only the case when the rate is going down, not up. Anyone surprised?
Your variable rate mortgage is about to go up. If you have a floating rate type mortgage that fluctuates with prime, your payment is about to rise. Relax, it’s not too bad. A rise of .5% on a $350,000 mortgage for example is $84 a month. The same logic will apply if you have a home equity line of credit (HELOC).
Your unsecured loan or line of credit may increase. If any loans are tied to the prime rate, you now have the privilege of paying your bank more interest each month! Yay…
Is There Actually Any Good News?
Well, a rise in prime is the quickest strategy to curb inflation. Wouldn’t it be nice to pay less at the grocery check out?
But, you’re probably thinking it’s not your job to solve Canada’s economic woes, right?
The good news is if your main debt is your fixed-term mortgage on your home, then your payment is not affected.
Same thing goes for any fixed-rate loans like a vehicle loan or lease. Those borderline criminals at Visa or Mastercard aren’t likely to raise that ridiculous rate they charge any higher on a .25% change in prime either.
I have a Variable Rate Mortgage. What Are My Options?
You can do nothing and make slightly higher payments each month. Prime rate is still incredibly low historically speaking, and the rates offered at prime less 1% or more for some of our clients mean this is still a very attractive rate.
You can consider locking into a fixed rate. Fixed rates aren’t directly correlated to the prime rate. They’ve been rising recently, but still very low. However, we’ve done some quick math on a variable rate mortgage at recent offerings versus a 5 year fixed rate, and you’ll need to see a roughly 1.5% increase in prime rate before these increases equal what you’re paying for the security of a fixed rate. But if you’re worried about the prime rising further, it may be worth a look.
You can hedge your bets. Some of our lenders offer products where you can divide your mortgage into a fixed portion, a variable portion, and sometimes even add a HELOC to the mix. It’s the latest and greatest trend: diversifying your risk!
What Now?
Well, first of all, turn off the TV, and quit reading all the noise from the internet. Well, except for our high-quality and entertaining content.
Talk to the only person who can give you an expert, unbiased opinion of your current situation…your local, friendly mortgage broker. You knew that’s how this story ends, right?
But in all seriousness, the first major change in a very important rate in two years is something you need to consider for a minute. Think about that tree’s worth of paper you’ve signed over the years and how this affects you and your family.
Then call an expert to do some quick math and tell you exactly what it looks like for your future financial health.