Don’t panic over higher mortgage rates
By Savio Vaz
It’s important to remember that interest rates are still very low. However, the tide may be slowly turning. In June we saw the messaging from Bank of Canada shift dramatically. Now in July, we are seeing the first rate increase in seven years. This increase was widely expected by most economists.
Why is this happening now? The past rate cuts put into place to support the economy against falling oil prices seem to have done their job. It’s time to move off these emergency low rates and get back to a normalized rate environment.
Should you lock into a fixed rate if you have a variable rate mortgage? There are plenty of sources trying to scare you – neighbours, friends, relatives – all well-intentioned. Read on.
Homeowners with variable-rate mortgages and lines of credit will likely see their rate increase along with a possible modest payment increase. But this slight increase will likely still keep variable rates below current fixed-term mortgage rates. People who are at their credit limits will be impacted more than most.
Before you panic, let’s put this into perspective. Moving 25 basis points really isn’t a big deal. What is a big deal, are the higher rates that could be coming… the next rate-setting day is September 6th.
Something to consider: Fixed-term mortgage rates have already started to move higher as they are tied to the bond market not the Bank of Canada.
So do the math. Determine if locking in your mortgage makes sense. How much more will your borrowing cost?
Check your variable rate (with the discount). For example, a prime less 0.50 with the old rate would be 2.20% (2.70% – 0.50%)
Visit your lender’s website and find their 5 year fixed term offering. For example, current 5 year terms are at 2.89-2.99%
(Banks lock in clients for a longer term, not the remainder of your mortgage term)
Now take the new BOC rate increase of 0.25% and add that to your discounted variable rate. For example, 2.89 – 2.45 %.
So why pay the banks a 0.44% increase on top of the BOC rate? Instead, increase your mortgage payments and pay off your mortgage faster.
In other words, if people are dealing with a variable rate mortgage or a line of credit, for $300,000, it is only going to increase their monthly payment by $37. That isn’t much.
Crunch the numbers and explore different scenarios with our website calculators or give us a call.
Bottom line: if you are a borrower and have a variable-rate mortgage or lines of credit tied to the bank’s prime lending rate you may be considering options and thinking about locking in your rate. More importantly, you need to have confidence in your mortgage plan. Work with an experienced mortgage broker who has access to a wide range of lenders and knows your situation. The right mortgage for you will save you money and stress.
For first time home buyers looking for their Dream Home in 2017, it’s important to be aware of the increase in interest rates and the more stringent mortgage rules. If you have any other questions, give us a call and we’ll walk you through the mortgage process or visit: yourmortgageyourway.ca/get-pre-approved/