Variable Rate Mortgages and Rate Increases

The Bank of Canada shocked us with the jumbo overnight rate increase on July 13 – and not by the expected 0.75% but 1%. This has had a direct impact on the Canada prime rate. This is the highest rate hike in over 20 years, and certainly gave us a jolt. All our clients with variable rate mortgages will be impacted by the prime rate increases. ?

If this is you, read on!

The crystal ball we were using 12 to 18 months ago has shattered. We usually use historical information as an indication of where rates may go. However, that has gone out the window in these unprecedented times. The war in Ukraine, supply chain issues, high inflation and several other factors are having an impact on the economy in Canada and around the world.

The Bank of Canada’s reaction to our high inflation is to ‘front-load’ the overnight rate to slow down the economy. The Bank of Canada has raised rates four times in 2022, and when the overnight rate increases, the prime rate increases. With runaway inflation, this was to be expected, and I think we will see more increases on variable rates before the end of the year.

What does all this mortgage nerdy talk mean? ?
  • If you are in a fixed rate mortgage, nothing changes for you.
  • If you are a client with a variable rate mortgage your payment will not change. When interest rates are low, more of your payment is going to the principal. When interest rates go up, more of your payment goes to the interest. But, when more goes to interest, you will start to fall backwards on your amortization schedule.
  • If you are a client with an adjustable rate mortgage your payment will go up.

So, what should you do today?

Variable Rate and Adjustable Rate Mortgage Holders

You could:

  1. Ride the Wave. What goes up, must also come down and what the Canadian economists can all agree on is that we will see rates come down at some point in 2023.
  2. Switch your mortgage to a Variable Rate that has a “Static Payment” option, which means your payment remains the same even when the rate increases.
    • Your payment will remain static (until the prime rate reaches the “trigger rate”). When interest rates rise (or fall), your payment stays the same. When interest rates are low, more of your payment is going to the principal. And when interest rates go up, more of your payment goes towards interest. However, when the payment stays the same, what must “give” is the amortization. When rates rise and less of your payment is going towards principal the amortization will get longer. And when rates fall, the amortization gets shorter. Learn more about Trigger Rates.
  3. Switch lenders and lock into a fixed rate term of your choosing.
  4. 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.
Making the Switch from Variable to Fixed

Many people have reached out to explore options to change from a variable rate to a fixed rate. Of course, I don’t know exactly what is going to happen with the Canadian economy, but personally I am sticking to my variable rate mortgage.

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”. Historically, fixed rates have always cost more than variable. This is, in my opinion, an undesirable option.

That said, you cannot put a price on “peace of mind”. So, if the thought of increased rates is a worry or something that causes you anxiety then yes, we can chat about you locking into a fixed rate.

What’s next?

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 tighten the budget. 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.