Prime Rate has increased to 2.70%

As of 10 a.m. on March 2nd, 2022, Bank of Canada announced its decision to increase the Overnight Rate by 0.25%. The immediate takeaway for those of you with a variable rate mortgage/ borrowing is that it is not the end of the world like how the media likes to portrait.

Depending on the kind of variable rate mortgage you have:

1. Your payment will increase as soon as the next scheduled payment date OR

2. The proportion of your interest costs will increase as compared to the principal being paid down with each payment (resulting in a longer amortization period).

Note: Prime Rate is at 2.70% after this update. Review your lender/bank commitment document to confirm which of the above scenario applies to your mortgage. Whichever be the case you would most likely be saving money as compared to signing up for a new or switching to a 5-year Fixed mortgage at current levels (more details below).

Key excerpts from the update from Bank of Canada this morning were:

1. The unprovoked invasion of Ukraine by Russia is a major new source of uncertainty and could lead to higher inflation and drop in economic confidence.

2. Economic growth in Canada was very strong in the fourth quarter of last year at 6.7%. This is stronger than the Bank’s projection and confirms its view that economic slack has been absorbed.

3. CPI inflation is currently at 5.1%, as expected in January, and remains well above the Bank’s target range. The Bank will use its monetary policy tools to return inflation to the 2% target and keep inflation expectations well-anchored. In future, the measures to tame inflation could involve further increase in policy rate and/or quantitative tightening (read as reduce holdings of Government of Canada bonds).

Overall, BoC message signals an end to its relaxed monetary policies and has prepared the financial markets for possible further tightening.

On the Mortgage interest rate front, Fixed-Rate mortgages have been witnessing steady increases since the last update and banks/ lenders have also started reducing the discount being offered on the variable rate mortgages. You can expect this discount to shrink as Bank of Canada continues to hike its Policy Rate. Right now, the spread between fixed-rate and variable-rate mortgages has increased to about 1.50% on average across the various types of mortgages. As recommended previously, borrowers with variable rate mortgages would benefit from making additional payment (lumpsum or additional payments) to the tune of 1% higher than what they are obligated to make. This will help them reduce your mortgage outstanding faster and alleviate some of the impact from future rate hikes. I should add that there is a better way to go about doing this and the video at the bottom of this newsletter has some clues.

Fixed Rate Mortgages

As you know the Fixed-rate mortgages in Canada are priced off the 5-year bond yields and those bond yields were largely steady till beginning of this week. Since my last update the yields had inched unto 1.836% from a previous high of 1.724% (on 18th Jan). But the geopolitical issues facing the world today appear to have spooked the bond markets (and also the equity market!) and as a result the bond yields had come down to 1.498% as of 1st March 2022. This is a significant drop and it can have implications on Fixed-rate mortgage. But right now it's too soon to take a firm call on which way the yields will move from here. You can expect a lot of volatility in the near term.

Looking at the last 6-week period, lenders continued to adjust their price of Fixed rate mortgages upwards. The lowest 5-year fixed for a purchase with a 20% downpayment is now about 2.59% OAC (higher from 2.54% reported last). While an insured mortgage (less than 20% downpayment) can be secured for about 2.59% OAC (up from 2.34% from the last update). Currently, the lowest rates are being offered by Credit Unions (banks and lenders are at a much higher price).

Growing your Financial Net Worth

Things have changed a lot since the prime days of our parents. You can look around us and notice that nothing is the same from even when we were younger. But unfortunately most Canadians have not changed their approach to finances and are following a recipe that has no longer works.

Recently, I was on a webinar with a realtor partner of mine and we dwelled into this aspect with the help of an illustration. I wanted to share an excerpt (about 14 minutes long) of that webinar with you and I am sure you will find this pretty useful.