The Bank of Canada has increased the overnight rate from 1.0% to 1.50% which will adjust the Bank of Canada lending rate from 3.20% to 3.70%. This latest rate increase will affect anyone with an Adjustable rate mortgage and will subsequently increase their payment by $24/month for every $100,000 borrowed. If you have a Variable rate mortgage with a fixed payment, or a fixed interest rate, this announcement will NOT change your payment.

Here’s a quick refresher of how variable rates are calculated:

• Prime rate – your discount = your interest rate
  • For example – 3.70% – .95% – 2.75%
    • The Prime rate is the variable and your discount from prime does not change.

Here are the key points pertaining to today’s latest increase:

• Inflation globally and in Canada continues to rise, largely driven by higher prices for energy and food costs.
• Inflation reached 6.8% in April which was higher than what the Bank expected. The rate of inflation is still more likely to increase further before it ultimately comes back down.
• By increasing the prime rate, the Bank’s hope is to eventually return inflation back to its neutral rate around 2%.
• Major factors that increase inflation still persist; The Russia/Ukraine conflict, China’s COVID-related lockdowns, and ongoing supply disruptions are all weighing on activity and boosting inflation.
• Job vacancies have increased, companies are reporting widespread labour shortages, and wage growth has been increasing and broadening across a variety of sectors.
• The housing market has cooled down from its extremely hot levels from the previous year.
• Based on excess demand, increased inflation will likely push interest rates higher.
• Increasing interest rates remains the Bank’s primary monetary policy instrument to decrease inflation.

MY personal thoughts:

It’s a strange time in the market and again the first thing I’ll stress is that you need to prioritize your own comfort when it comes to how we react to this latest increase. For what it’s worth, I do believe that the prime rate will continue to increase, but by what amount? It’s tough to say. I think that a majority of Canadians have become quite fearful of interest rates rising above their means, and this will hopefully encourage people to start prioritizing saving and/or being more selective/careful about what they spend their money on. A more cautious approach will “hopefully” help with inflation and buy some time for the supply chain issues, overseas conflict and Covid complications to get sorted out.

I also believe that people are earning more than they did in years previous, and hopefully that’s the case for you. Consider the example below and let’s say:

• You’ve got a Mortgage of $500,000
• The Interest rate as of May 31st @ Prime – .80% amortized over 30 years
  • 2.40%
• Interest rate as of June 01st @ Prime – .80% amortized over 30 years
• 2.90%
• Old payment = $1,946/month
• Difference = $130/month * 12 months = $1,560 year
• New payment = $2,076/month
  • Difference = $4,160
• Old wage = $33/hr, 40 hours a week, annual earnings of $68,640
• New wage $35/hr 40 hours a week, annual earnings of $72,800

Conclusion – a 2$/hour raise will earn you $4,160 more per year and cover the difference in your new mortgage payment two and a half times over.

If you’re staying variable, you can increase your payments manually to what they’d be at 4% so that you become comfortable with higher payments. This way you’re benefiting from a lower interest rate now, and paying your mortgage off more aggressively as anything beyond your normal payment goes directly towards the principal. Keep in mind: You originally qualified at 5.25% so in theory 4% should be manageable.

If you’re alright with the change in mortgage payments:

• You’re still in the best and lowest mortgage product available. Most of our clients have discounts from Prime of .75% – 1.10%. Therefore your rate today is somewhere around 2.60% – 2.95%
• Historically Variable rate mortgages have outperformed Fixed interest rates based on the previous 25 years:
  • 5 year Variable rate average – 4.38%
  • 5 year Fixed rate average – 5.50%
• Remember that you’re in it for at least 5 years and we’ve only been dealing with 6 months worth of rate increases. It could still come back down.

If you’re worried about your payment increasing any further, may we suggest the following options:

1. We can switch you from an Adjustable Variable rate to a Variable rate with a fixed payment. Why? Because the interest rates on these mortgages are currently in the low 3’s which is much better than today’s fixed rates which are around 4.5%.
2. We could switch you to a 1 or 2 year fixed interest rate, which will provide payment certainty for the next couple years while the Bank of Canada tries to navigate and conquer inflation. These rates are around 3 – 3.50%.
   1. Please note if you want to switch to one of these options, you’ll need to pay the 3 month interest penalty which is roughly 1.5 times your monthly payment. This amount can be included in your new mortgage so it doesn’t need to come directly out of pocket at the time of the change.

In short – if inflation continues to rise, so will the Prime rate. More increases are on the way, it’s just tough to say how many and when. That said, we believe we could see the variable interest rate hover around 4% for a year and then come back down. Keep in mind, the Prime rate was at 3.95% pre-pandemic.

What does this mean for your property values:

The headlines are suggesting that home primes are going to crash. But I don’t think so. The last time we saw any type of Real Estate crash unemployment was around 12%, population growth was stagnant, and the supply of homes was on par with demand. Compared to now, anyone who wants a job can more or less get one, BC’s population is growing exponentially based on new families migrating to Canada as well as Canadian citizens are moving here from out of province when the supply of homes is much less than the demand. Sure, it’s possible that the value of your home could go down/stay stagnant in the short term if you bought within the last 6 months, but give it time (5-7 years) and you’ll end up on top, I can promise you that.

My mortgage: Scotiabank STEP mortgage, Prime – .95% and I’m staying variable. I’m not happy with the change in Prime, or the increase in my payments, but I know the benefit of being in a variable interest rate instead of a fixed and I truly believe that in the long run (5 year term) a majority of people including myself will end up on top. Unfortunately for my family and many others, things are going to be a bit tighter for the next year or so.

Please know that I’m always just an easy phone call away and available to discuss your mortgage options with you. My team and I are here to support you in any way we can and want you to reach out if needed. Here’s a LINK to my online scheduler and look forward to your booking something if needed.

The next scheduled date for announcing the overnight rate target is July 13, 2022.