The Bank of Canada raised its key interest rate by 0.25% today, as expected.

The biggest question is…”SHOULD I LOCK IN?”

Today was just a 0.25% increase. We knew this was going to happen at some time or another!  When discussing fixed vs variable we took into account the inevitable rate hikes as part of your mortgage strategy.

Please consider the following:

 The monthly payments on a $500,000 mortgage with a 25 year amortization and a Variable Rate at 1.35% ( P -1.10%)  was previously $1963.00 per month.

 A 0.25% increase in rate to 1.60% increases your payments to $2022, which is a difference of only $59.27 per month. If you have a static payment variable rate, your payment won’t change at all.

0.25% increase represents roughly $12.00 / $100,000.00 in mortgage payments

 If you were to lock yourself into a 5-year Fixed Rate at 3.29%, an average 5-year fixed rate in the industry right now, your monthly mortgage payment would be $2,441.25. That is a difference of $382.30 per month, or $4,587.60 per year!  As opposed to the $620.00 in interest for the year, less if you owe less then 500k

In addition to this large monthly payment increase, you would be changing the flexibility of your mortgage. If you ever need to break a Variable Rate Mortgage, the penalty is just 3 months of interest (around 0.5% of your mortgage).  However, the same can not be said for fixed rate mortgages. Fixed rate penalties are determined using the “Interest Rate Differential”, a calculation that can be up to 4.5% of your mortgage balance!

The Bank of Canada would have to raise their Key Interest Rate another SIX times before you arrived at todays Fixed Rates.

Historically the BOC moves their rates in increments of 0.25%.

bear in mind that the Bank of Canada makes just 8 rate announcements annually.

Prime Rates with the lenders will likely rise from 2.45% to 2.70% today. The highest Prime Rate has been in the last 12 years is 3.95%…only 1.25% higher than today.

If Prime were to hit the 12 year high of 3.95% and your prime discount is 1.10%, your rate is still only 2.85% which is STILL .44% lower than today’s average 5 year fixed.

Remember, the banks love Fixed Rate Mortgages, and would love to see you locking into those fixed rates right now, why? Because nearly ¾ of mortgage holders break their term before maturity, triggering large IRD penalties.

“OK FINE CANDICE, I’LL STAY IN MY VARIABLE RATE, BUT I WANT TO PROTECT MYSELF SHOULD RATES CONTINUE TO INCREASE, SO.. WHAT CAN I DO?”

NOW is the time to be taking advantage of savings!

 Put aside that $382.30/month ( that your rate would increase if you locked in) into a savings account or into an investment vehicle that you feel comfortable in, this way you will be taking advantage of the current low rates while still protecting yourself against future rate increases.  

 OR

Use the savings you accrue while rates are low to exercise your prepayment privileges to pay down your mortgage balance quicker, lowering your overall interest costs again guarding against any rate increases.

 Be PROACTIVE! 

Please, as always reach out to me if you have any questions at all