The Bank of Canada has raised its overnight target rate by a quarter-point, bringing it to 0.50%. This is the first step of potential further increases amid economic recovery from the COVID-19 pandemic.
What does this mean?
Banks and other financial institutions are expected to raise their prime rate in the coming days, which will increase rates for variable-rate mortgages and line of credit holders.
Variable-rate mortgage holders will see an increase once their lender adjusts their lending prime. For example, your current variable rate is 1.45%, you will see an increase to 1.70%. Keep in mind, not all lenders adjust your payment amount to cover the higher interest cost. If your mortgage payment stays the same, you are at risk of your amortization going backwards because more of your payment will go towards the interest portion and less towards the principal. Payments should increase roughly $12 per $100,000 of debt, based on a 25-year amortization.
I’m here to advise you on the best course of action to help your long-term mortgage goals. As a rule of thumb, if your interest rate is still less than 3%, it does not make sense to convert to a fixed term. I can help work with you to develop strategies like increasing payments or the frequency of your payments to help mitigate the risk of higher interest rates.
Here’s a recap on what the overnight rate has done over the past few years:
In late 2018 the overnight rate was at 1.75%. It remained there due to the strengthening of the Canadian economy, rising fed rate in the United States, and improving employment and rising inflation. The economic situation drastically changed in 2020. The rapid spread of COVID-19 throughout the globe led the Bank of Canada to cut the overnight rate three times in March 2020 from 1.75% to 0.25%, as the virus was expected to shock the economy negatively. The overnight rate has remained at this level since. Today is The Bank of Canada’s first rate hike since October 2018.
The Bank will publish its next full outlook for the economy and inflation on April 13, 2022. For more information, visit The Bank of Canada’s website