Worried About Today's Rate Increase?
Posted on Wed, 06 Sep 2017 in: General
The Bank of Canada announced this morning that it’s increasing the overnight lending rate from 0.75% to 1%; the move comes as a surprise to most economists who expected the rate increase to arrive in October. The overnight lending rate is not directly correlated with the rates banks offer their clients on mortgages, loans, and line of credit, but it’s a safe bet that banks will increase their rates to correspond with this increase.
Since the last rate increase in July I have had a lot of friends and family ask me about the implications of the rate increase for them, so I figured I would write a blog post for everyone else to alleviate their fears.
Fixed Rate Mortgages
I worked at RBC doing personal and small business lending for the last few years, and as a result I was lending at some of the lowest rates in recent history. The advice I gave my clients was to go with a four or five-year fixed rate on their mortgage. The rationale was that those clients would be locking in those historically low rates through the next five years and would not be subject to rate increases. To be concise, if you have a fixed rate mortgage right now you do not need to worry about the rate increase, your rate and payment will remain unchanged.
Variable Rate Mortgages
Unlike borrowers with a fixed rate mortgage, those of you with a variable rate mortgage will likely be impacted by today’s news. As a refresher, your variable rate is your lender’s prime rate minus a certain percentage that you would have negotiated for when you signed your mortgage agreement.
For example, in July the RBC prime rate was 2.95%, so if you had a variable rate of prime – 0.5% then you have a current rate of 2.45%. If RBC increases its prime rate to correspond with the BOC rate hike then your new rate will be 3.2%-0.5%, equalling 2.7%.
For many, their payments will remain unchanged by the increase in rate, however, less money from each payment will be going towards their principle amount owing, and more will be lost to cover interest. This will mean less of their mortgage will have been paid down by the time they go to renew.
Loans, Lines of Credit, Home Equity Lines of Credit
It is not just mortgage holders that will be affected by today’s news, those of you with lines of credit and home equity lines of credit (HELOC) will also be impacted. If you have a traditional loan then you likely have a fixed interest rate and will not be affected.
If you have a line of credit or HELOC then your rate will be the prime rate of your lender plus a certain percentage. If you are carrying a balance on either of these lending facilities then the amount of your monthly payments will increase if your lender increases its prime rate.
I hope that this has been helpful to anyone who is worried about today’s news from the Bank of Canada. If you have any questions about your lending products please do not hesitate to reach me on Instagram and Twitter, or send us an email. For future updates on mortgages, insurance, and finance follow us on Facebook.