A news article recently came out where a Scotiabank economist said that we could see the Prime rate jump 8 times by the end of 2023. This, along with FIXED interest rates increasing has caused a lot of concern and many are considering locking in their variable interest rate mortgage to fixed. Here’s why I’m not.…
- The Bank of Canada stated at their Oct 26th meeting that they will keep Prime at 2.45% till mid-2022.
- Historically the Bank of Canada only increases or decreases the Prime rate by .25
- What other major banks economists are saying. PS. they have no control over making a decision to change prime.
- BMO – 11 rate increases by the end of 2023 (2.75% increase)
- TD – 3 rate increases by the end of 2023 (.75% increase)
- CIBC – 4 rate increases by the end of 2023 (1% increase)
- Desjardins Capital Markets – 2 rate hikes in 2022, followed 3 more in 2023 (1.25% increase)
- Most Economists are stating the first rate hike will be in July of 2022 which I’d agree with given what the Bank of Canada stated at their meeting on the 26th.
So let’s presume there are 8 rate increases from July 2022 – July 2024 and do the math based on a Mortgage of $500,000 (avg in Canada) amortized over 25 years. Let’s base the comparison on a mortgage payment comparing a fixed rate of 2.69% (average right now) VS a variable rate of 1.50% (Average rate for the past 3 – 4 months)
8 rate hikes
- Total savings in the first nine months (November 01st – July 01st 2022) – $2,408 @ 1.45%
- Total savings between (October 01st – December 31st) – $732 @ 1.70%
- Total savings after 1 year, 6 months (January 01st– March 31st, 2023) – $561 @ 1.95%
- Total savings after 1 year, 9 months (April 01st 2023 – June 30th, 2023) – $390 @ 2.20%
- Total savings after 2 years (July 01st, 2023 – September 30th, 2023) – $219 @ 2.45%
- Total savings after 2 years, 3 months (October 01st – December 31st, 2023) – $45 @ 2.70%
- Total savings after 2 years, 6 months (January 01st – March 31st, 2024) – ($129) @ 2.95%
- Total savings after 2 years, 9 months (April 01st – June 30th, 2024) – ($303) @ 3.20%
- Total savings after 3 years – (July 01st– November 01st 2024) ($477) @ 3.45%
After all 8 rate hikes, you still saved $3,446 by staying with a variable interest rate. Furthermore, the outstanding balance at the end of your 5-year term is still $1,328 less if your variable rate stays at 3.45% for the remainder of the term.
What if there were only 4 rate hikes over that same period of time, which in my opinion seems a bit more reasonable.
4 rate hikes
- Total savings after nine months (November 01st, 2021 – July 01st, 2022) – $2,408
- Total savings after 1 year, 3 months (July 01st, 2022 – February 01st, 2023) $1,708
- Total savings after 2 years (February 01st – September 01st) $1,307
- Total savings after 2 years, 3 months (September 01st – April 01st) $910
- Total savings after 2 years, 9 months (April 01st – November 01st, 2024) $511
After all the rate hikes you saved $6,844
Other important factors to consider:
- Your mortgage penalty – Fixed vs Variable
- Example using the same numbers from above and your variable rate has increased by 2%. Let’s say you paid your mortgage down from $500,000 to $465,000 in 3 years.
- 6 out of 10 Canadians change their mortgage in the first 3 years
- Fixed Penalty – $15,810
- Variable Penalty – $2,848
- Difference – $12,962
- 6 out of 10 Canadians change their mortgage in the first 3 years
- Example using the same numbers from above and your variable rate has increased by 2%. Let’s say you paid your mortgage down from $500,000 to $465,000 in 3 years.
Reasons for breaking your Mortgage:
- Early payout
- Secure a lower rate
- Changing the name on the term
- Health Complications, Accidents, etc
- Relationship status has changed.
- Getting married or meeting someone new
- Refinancing
- Selling the home
- A .25% change in the Prime interest rate will change your mortgage payment by $13/month for every $100,000 you borrowed.
- At any point in time, you can convert your variable rate mortgage to a fixed interest rate, and therefore we can wait to see what happens to the market and take advantage of a rate special once they’re available.
- Inflation. Yes, it’s increasing, but I do not think it’s solely due to real estate prices. Look at the cost of lumber, shipping, and gas. These all contribute to increasing the inflation rate. Until we start seeing these prices return back to normal, I don’t foresee the Prime rate dramatically increasing.
To wrap this all up, yes the Scotiabank economist did say 8 rate hikes by the end of 2023, but if you read the whole article a BMO economist states “I do expect at least one, maybe two rate hikes next year but definitely not four” Sometimes these headlines are just to catch our attention but now we know the math and this is why I’m staying with a variable rate mortgage and suggest you should do the same.
Disclaimer – If you’re already in a fixed interest rate, I’m assuming we discussed the pros and cons of variable vs fixed and decided to go with a fixed based on the offered interest rate at the time. This article is NOT saying I’m opposed to a fixed interest rate, I’m simply saying that if you’re currently in a variable interest rate, you should not fear the Headlines. They’re just headlines.
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