Prime Rate has increased to 3.70%
As of 10 a.m. on June 1st, 2022, Bank of Canada announced its decision to again increase the Overnight Rate by another 0.50% and thus bringing the Prime Lending Rate to 3.70%. So far in 2022 (present rate hike cycle) Bank of Canada has increased the Overnight Rate and thereby the Prime Rate by 1.25%. The immediate takeaway for those of you with a variable rate mortgage/ borrowing is that your interest costs continue to rise in the short term.
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 will increase to 3.70% at most lenders after this update (except for TD
which should be at 3.85%). Review your lender/bank's commitment document to confirm which of the above payment 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).
Fixed Rate Mortgages
As you know the Fixed-rate mortgages in Canada are priced off the 5-year bond yields and right now those bond yields at higher by about 27 bps at 2.813% from where they were 6 weeks ago. Since my last update, the yields saw a high of 2.977% on 8th May and a low of 2.574% on 25th May 2022. The decision by European Union to phase out Russian oil supplies via pipeline and the resultant expectation of further increase in inflation appears to be the latest cause for the yields to rise in the last 2 days. As things stand today, yields have risen by nearly 2.50% from the lows witnessed in July 2020 when they stood at around 0.302%.
The lowest 5-year fixed for a purchase with a 20% downpayment is now in the range of 4.14% to 4.24% OAC (higher from 3.90% to 4.00% reported last). While an insured mortgage (less than 20% downpayment) can be secured in the range of 3.75% to 4.00% OAC (largely unchanged from the last update). For rental properties, the range is between 4.60% to 5.00% OAC.
For now, mortgage eligibility continues to be lower when a borrower opts for a new Fixed Rate mortgage (as compared to Variable Rate mortgage) on purchase of Owner-Occupied Property or Transfer on mortgage on Owner Occupied property due to higher qualification rates. But that will change if Bank of Canada follows through with another 50 bps increase in July.
As far as Investment properties are concerned, the mortgage eligibility will reduce even with Variable Rate Mortgage for anybody putting in a fresh application henceforth except for some very selected borrowers.