So, the Bank of Canada threw us a curveball this morning and raised the overnight rate AGAIN today. Not by the originally anticipated amount of .75% but instead by 1% , which directly impacts the Canada Prime rate. This is the highest rate hike in over 20 years, so we certainly didn’t see this coming.
Therefore; all variable rate mortgage holders are directly impacted. This will also affect those qualifying for a new mortgage, including refinances as it coincides with the Canada Mortgage Stress Test. As of today, Canada Prime is 4.70%. To qualify for a mortgage one has to qualify at the Canada Benchmark rate of 5.25% or the contract rate plus 2%, whichever is higher. For example, if one wanted to lock into a 5 year variable rate of rate of 4.30% (Prime less .40%) they would have to qualify at 6.30% (contract+ 2%). This will pose an issue for many as it may push one far beyond the allowable debt servicing ratios.
Please see the Prime History Chart HERE.
So the Crystal Ball we were using 12 to 18 months ago has shattered. We used to use history as an indication of speculating where rates may go however now that has gone out the window as these are unprecedented times. The war in Ukraine, supply chain issues, high inflation and several other factors are having an impact on economies in Canada and around the world.
This is monetary policy in it’s truest form and we can expect to see more increases ahead with levelling off in the next 18-24 months.
So what should you do today?
Well you have four main options at this point. The 5 year fixed rate is currently in the mid 5% range and will come with a hefty IRD penalty should you have to break your mortgage at some point if “life happens” so this is an undesirable option.
Also, the bond yields are coming down so we expect fixed rates could fall somewhat in the new future as they jumped up dramatically in such a short period of time.
- Ride the Wave. What goes up comes down and what the Big Bank Chief Economists can all agree on is that we will see rates come down at some point in 2023.
- Switch your mortgage to a Variable Rate that has a “Static Payment” option
- Your payment will remain static (until the prime rate reaches the “trigger rate” where the bank then will need to collect a higher monthly payment if prime continues to climb). The negative of this payment is that come mortgage renewal time you will have paid far less down on your original principal but on the flipside your payment is relatively secure.
- Switch Lenders and Lock into a 1 year or a 2 year fixed rate of around 4.39- 4.59% at the moment.
- Refinance to do a debt consolidation or to bump out your amortization in the interim until rates settle while remaining in a variable or a 1 or 2 year fixed term.
I am in the same boat as all of you as a variable rate mortgage holder with my properties. We as a household have had to reprioritize our spending/ budget. It is uncomfortable for sure but we have all done the best we could given the information we had at the time. We do not know where rates will go in the future and have no control over it, all we can do is continue to make the best decisions we can for our financial future today while managing our stress levels and cash flow.
The Place To Mortgage team strives to stand out from everyday mortgage lenders and banks. Much more than mortgage professionals, we are always looking for ways to go above and beyond for our clients; offering ongoing strategies, programs and incentives to help ensure your home ownership and financial success.
Please do not hesitate to reach out to discuss this further.