Today, the Bank of Canada (BoC) held a meeting to discuss interest rates. The decision was to increase the rates by 0.25%. This is the first increase since October 2018. The Canadian economy performed better than the BoC had anticipated. The Canadian economy grew by 6.7% in 2021. Inflation is at an all-time high at 5.1%. The inflation target is below 2%. For various reasons, such as problems in the supply chain and changes in household spending patterns due to Covid-19, they had always concluded that this was temporary. On the other hand, with the recent events in Ukraine and the health measures easing, the BoC thinks that inflation is here to stay a little longer than previously expected. The BoC therefore believes that it must bring interest rates back to a normal level and move away from emergency rates to curb inflation. This means that we should expect further increases this year and in the coming years. The BoC has also decided not to make any changes to its Government of Canada bond purchase program and will continue to replace bonds that mature.
When can we expect the next hike? In theory, in 3 to 6 months. The economic effects of a rate hike take a few months to be measured. The BoC does not want to send us into recession by rushing increases. The increase should be 0.25% each time. This means that it is possible to have rates between 0.25 and 0.5% higher by December 2022. The next meeting of the BoC will take place on April 13, 2022. In April,l they will also publish their report on the monetary policy and will give us information on their future strategy.
What is the impact on your mortgage and what to do for the future?
If you have a fixed rate mortgage, there is nothing for you to do until renewal, as your rate will not change. If you have a variable rate mortgage but with a payment that remains constant (your mortgage is most likely with TD), you don't have to do anything either. Your payment will not change as the interest rate increases. However, you will see your rate increase, and you will repay your mortgage a little more slowly. You still make significant savings because all my clients have either purchased or refinanced their property in the last two years.
If you have a variable rate with any other bank. A 0.25% increase will add about $12 per month per $100,000 of mortgage to your payment. So, if your mortgage is $500,000, your payment will change approximately by $60 per month. For all my variable rate clients, the rate you currently have was over 1% lower than the fixed rate at the time and is now over 1.5% lower than the current fixed rate. Even with the rate increase, you realize savings with every payment you make. At the time of writing this message, the banks have still not changed their prime rate. However, I expect this to happen in the next few hours/days. Your rate will only change when the banks change their key rates. The payment is going to reflect the change next month as they have to give you 30 days notice. If you are starting to lose sleep over this email, please contact me, so we can discuss converting your variable rate to a fixed rate. If you are a customer, I will contact you in the next few days to give you the exact amount of your payment change.
If you have a pre-approval with me on a variable rate. Your pre-approval is based on Prime minus a certain discount. As the Prime rate may change for your bank, your rate will be 0.25% higher because your discount is protected by rate hold. This will not affect your capacity of borrowing.
If you are in the process of getting your mortgage approved. I will contact you in the next few days to explain what will happen.
If you still don't have a mortgage and are thinking of buying this year, I suggest you contact me as soon as possible to start your pre-approval. This will allow us to hold rates and protect you from future rate increases.
If you have any questions, do not hesitate to contact me, Simon Bilodeau mortgage broker at 604-828-9864 or by email at email@example.com