As of 10 a.m. on July 13th, 2022, Bank of Canada announced its decision to increase the Overnight Rate again and this time by an aggressive 1.00%. This elevates the Prime Rate to 4.70% and so far in 2022 (present rate hike cycle) Bank of Canada has increased the Overnight Rate and thereby the Prime Rate by 2.25% (almost doubling it from Feb 2022). The immediate takeaway for those of you with a variable rate mortgage/ borrowing is that your interest costs continue to rise in the short term.
Depending on the kind of variable rate mortgage you have:
1. Your payment will increase as soon as the next scheduled payment date OR
2. The proportion of your interest costs will increase as compared to the principal being paid down with each payment (resulting in a longer amortization period).
Note: Prime Rate will increase to 4.70% at most lenders after this update (except for TD which should be at 4.85%). Review your lender/bank's commitment document to confirm which of the above payment scenario applies to your mortgage. Whichever be the case you would most likely be saving money as compared to signing up for a new or switching to a 5-year Fixed mortgage at current levels (more details below).
Even with this increase, the spread between fixed-rate and variable-rate mortgages has remained steady, in the range of 1.15% to 1.35% on average across mortgage types. The spread is at the higher end of the range for anybody looking for a mortgage with 30-year amortization or rental property mortgages.
Fixed Rate Mortgages
As you know the Fixed-rate mortgages in Canada are priced off the 5-year bond yields and right now those bond yields are higher by about 20 bps at 3.111% from where they were 6 weeks ago. Since my last update, the yields saw a high of 3.61% on 13th June and a low of 2.90% on 4th July. As things stand today, yields have risen by nearly 2.80% from the lows witnessed in July 2020 when they stood at around 0.302%.
The lowest 5-year fixed for a purchase with a 20% downpayment is now in the range of 4.80% to 5.00% OAC (higher from 4.14% to 4.24% reported last). While an insured mortgage (less than 20% downpayment) can be secured in the range of 4.5% to 4.60% OAC (up from 3.75% to 4.00% when last reported). For rental properties, the range is between 5.30% to 5.60% OAC (up from 4.60% to 5.00%). (Above mentioned ranges is for Prime borrowers only). The pace of increase in Fixed Rates have definitely reduced and there are rumours that some lenders might consider lowering rates if the recent drop in bond yields continue.
Going forward, with each increase in Prime Rate / associated lending rates, the mortgage eligibility will reduce even for borrowers opting for Variable Rate mortgages. So, it's critical to reconfirm your eligibility for a purchase / refinance or switch given today’s increase.
What can you do?
Over the last couple of weeks, I have written a series of Blog posts addressing some of the key considerations in an increasing interest rate environment and what you can do to be better prepared. I published these on my website and posted them on my social media pages. If you are following me/my page on these platforms then you will be find them in your social media feed or else feel free to subscribe to my blog posts.
You can find these posts here.
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