Prime Rate has increased to 5.45%
As of 10 a.m. on September 7th, 2022, Bank of Canada announced its decision to increase the Overnight Rate again and this time by an aggressive 0.75%. They also indicated that the Policy Rate would need to increase further to control inflation and bring it back to 2% levels.
This elevates the Prime Rate to 5.45% and so far in 2022 (present rate hike cycle) Bank of Canada has increased the Overnight Rate and thereby the Prime Rate by 3.00% (more than doubling it from Feb 2022). 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 5.45% at most lenders after this update (except for TD which should be at 5.60%). 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).
After today’s increase, the spread between fixed-rate and variable-rate mortgages has narrowed down drastically or even eliminated in most cases. The difference in Fixed and Variable rate mortgages is on average down to 0% to 0.25% depending on the mortgage type (Prime Mortgages only). The spread is positive only for those looking for a mortgage with 30-year amortization or rental property mortgages.
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 are higher by about 20 bps at 3.324% from where they were 8 weeks ago. Since my last update, the yields saw a high of 3.38% (intraday) on 31st August and a low of 2.521% (intraday) on 1st August. As things stand today, yields have risen by nearly 3.00% 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 4.80% to 5.00% OAC (unchanged from the levels seen in July 2022). While an insured mortgage (less than 20% downpayment) can be secured in the range of 4.55% to 4.70% OAC (largely unchanged from levels seen in July 2022). For rental properties, the range is between 5.30% to 5.70% OAC (up by about 10 bps from July 2022). Slightly lower rates might be available for terms shorted than 5 years and my recommendation would be to opt for such shorter terms.
With today’s increase, there won’t be much material difference in mortgage eligibility when a borrower opts for a new Variable Rate mortgage over a Fixed Rate mortgage. Also, if you had secured a mortgage pre-approval with Variable Rate mortgage, please note that the mortgage amount specified would NOT be valid anymore and so you need to check-in with your mortgage broker to confirm the revised amount.
What can you do?
Over the last couple of months, I have written a series of Blog posts addressing some of the key considerations in an increasing interest rate environment and what you can do to be better prepared. You can find these posts here.
1. Some of these blogs were forward looking; especially around the trigger rate and how Fixed Rate Variable rate mortgages would behave once the Prime Rate crosses/reaches 5.20%. If you have such a mortgage then you might potentially be getting a communication from your bank pretty soon.
2. If you are looking to convert your Variable Rate Mortgage to a Fixed Rate, then now might be a good time to reach out to your lender and ask about options that they might offer. You can consider locking into a shorter term like 2 or 3 years given that the spread has reduced and the near term uncertainty might continue.