Today, the Bank of Canada (BoC) held a meeting to discuss interest rates. The decision was to increase rates by 0.5%. This increase is historic since it is the first time that there are two increases of 0.5% two months in a row. The Canadian economy continues to perform well and has entered what they call excess demand. This means that Canadians are using their credit and depleting their savings faster that is normal for our economy. Inflation is at 6.8%, a level not seen in the past 31 years. The bank's inflation target is below 2%. The reasons why we have such high inflation are multiple. The first is the rising cost of energy such as oil and natural gas. The increase in the cost of petroleum products being the main energy source for the transport of goods, creates an increase in everything that needs to be transported. Costs have increased due to global uncertainty created by the Russian invasion of Ukraine. Several countries are working to increase their production but there is always a delay before seeing the reduction at the pump. This war also created uncertainty for grain which increased the cost of food. The second component that creates inflation is the problems in supply chains that persist despite the end of the pandemic. One of the reasons why everything costs more is the lack of supply in several areas. This means that there are more buyers than goods for sale in several sectors of the economy. This allows companies to charge more for the products they have to sell. There are several reasons for supply chain issues, one being China continuing with its 0 covid-19 policy that shuts down entire cities and neighborhoods including factories. There is also a problem in transporting materials and products between countries. Finally, there is a lack of personnel that our companies cannot fill, forcing them to reduce the hours of operation. There is therefore a lot of pressure on the Canadian economy to increase the production of goods and services in a climate where it is difficult to do so.
The inflation problem is not just in Canada, it is a global phenomenon and Canada seems to be doing relatively well. The Americans have an inflation rate of 8.3% and Europe of 8.1%. The majority of Central banks have raised their interest rates and the growth of the global economy has started to slow down. This means that there should be a reduction in inflation in the coming months. The changes made by the Bank of Canada will also take a few months before making a difference in the country's economic data. We will start to see the effects of the first rise and a bit of the second in the next announcements of economic data.
When can we expect the next hike? The BoC has clearly indicated that they want to fight inflation at all costs. We have already had 1.25% rate hikes this year. The BoC does not want to send us into recession by rushing increases, but they are not ruling out the possibility of another increase in July. Looking at rate hikes in the past, the 0.5% is really rare and has often been followed by a drop a few months later. We just had two in a very short period of time. I will continue to monitor economic data and keep you informed. The next BoC meeting will take place on July 13, 2022.
What is the impact on your mortgage and what to do for the future?
If you have a fixed rate mortgage, you don't have to do anything until renewal because your rate won't change. If you have a renewal coming up within the next 12 months, I would start the process as soon as possible. If you are unsure when to renew, please contact me. 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'll see your rate go up, and you'll pay off your mortgage a little slower.
If you have a variable rate with another bank. A 0.5% increase will add about $24-26 per month per $100,000 of mortgage to your payment. So if your mortgage is $500,000, your payment will change by about $120 per month. For all my variable rate clients, the rate you currently have was well over 1% lower than the fixed rate at the time and is now over 2% lower than the current fixed rate. Even with the rate increase, you save money 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 within the next few hours/days. Your rate will only change when the banks change their key rates. The payment will reflect the change next month if you pay monthly. If you pay weekly or bi-weekly, there should be no change for a few payments. If you are starting to lose sleep over this email, please contact me so we can discuss converting your variable rate to fixed rate. If you want to know your new payment amount, please email me with your current mortgage balance and payment frequency. With this information, I can calculate your new payment.
If you have pre-approval with me on a variable rate. Your pre-approval is based on Prime minus a certain discount. As the prime rate will change for your bank, your rate will be 0.5% higher because your cashback is protected by a rate hold. This will not affect your borrowing capacity. If we have a rate hold for a fixed rate, this does not apply to you unless your rate hold is about to expire. I will contact you in this case.
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 maintain rates and protect you against future rate increases.
If you have any questions, please do not hesitate to contact me at 604-828-9864 or by email at simon@refinancebc.ca.