First off, let me be totally frank with you and tell you that I do not have a crystal ball to predict if your mortgage payment will increase by 50% or not. But given what we know about the persistently high inflation figures, the strong reaction from Bank of Canada and its stated goal to raise Policy Interest Rate to the 2~3% range (proposed neutral range), we can try to project what your monthly payments could look like for variable rate mortgages with floating payments. For additional context, in the last couple of years banks have generally set their Prime Rate to be about 2.20% higher than the Bank of Canada Policy Interest Rate. So, we can expect the Prime Rate to reach 5.20% or thereabouts.
Given that everybody with such a mortgage product will have different mortgage amounts, discount from Prime Rate and payments, I will base the analysis assuming $100,000 as the original mortgage amount and 1.65% (or Prime minus 0.80%) as the rate prior to March 2022. I have chosen this interest rate as this is generally what was available right before increases in Prime Rate/Policy rate started kicking in. Also, the impact varies according to the amortization period and so have presented for the two most commonly occurring periods (25-year and 30-year).
Interest Rate (Prime Minus 0.80%) | Mortgage Payment (monthly) | % Increase in Monthly Payment since March 1st 2022 | Movement in Prime Rate |
|---|---|---|---|
1.65% | $406.75 | NA | Prior to 2nd March 2022 (Prime Rate = 2.45%) |
1.90% | $418.64 | 3% | 0.25% increase on 2nd March 2022 (Prime Rate = 2.70%) |
2.40% | $443.00 | 9% | 0.50% increase on 13th April 2022 (Prime Rate = 3.20%) |
2.90% | $468.13 | 15% | 0.50% increase on 1st June 2022 (Prime rate = 3.70%) |
3.65% | $507.22 | 25% | Possible 0.75% increase on 13th July 2022 (Prime Rate = 4.45%) |
4.40% | $547.93 | 35% | If 0.75% increase on 7th Sept 2022 or by later this year (Prime Rate = 5.20%) |
Table 1: $100,000 Mortgage with 25-year amortization
Interest Rate (Prime Minus 0.80%) | Mortgage Payment (monthly) | % Increase in Monthly Payment since March 1st 2022 | Movement in Prime Rate |
1.65% | $352.09 | NA | Prior to 2nd March 2022 (Prime Rate = 2.45%) |
1.90% | $364.27 | 3% | 0.25% increase on 2nd March 2022 (Prime Rate = 2.70%) |
2.40% | $389.33 | 11% | 0.50% increase on 13th April 2022 (Prime Rate = 3.20%) |
2.90% | $415.30 | 18% | 0.50% increase on 1st June 2022 (Prime rate = 3.70%) |
3.65% | $455.91 | 29% | Possible 0.75% increase on 13th July 2022 (Prime Rate = 4.45%) |
4.40% | $498.41 | 42% | If 0.75% increase on 7th Sept 2022 or by later this year (Prime Rate = 5.20%) |
Table 2: $100,000 Mortgage with 30-year amortization
Note: Prime Rate was at 3.95% before it was reduced to 2.45% over March 2020
To extrapolate to your situation, consider:
1. The % increase in your monthly payment will be close enough to above figures irrespective of your specific mortgage amount, with the increase being marginally higher if your original interest rate was lower than 1.65% and vice-versa if higher than 1.65%.
2. In absolute terms, the increase in your monthly payment with each 0.25% increase will be about $12 - $13 for every $100,000 of mortgage outstanding at onset of the term.
Trust this analysis will help you in preparing for the further increases that we might witness in the coming months. I would recommend that you try and increase your payments in advance of the potential increases so that you are proactively adjusting your monthly budget rather than trying to adjust after the fact.
While the above analysis was focused on variable rate mortgages with floating payments, I will address the matter of variable rate mortgages with fixed payments in next week’s blog as I suspect that we might hit the “trigger rate” in the coming months.
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