Prime Rate has increased to 5.95%
As of 10 a.m. on October 26th, 2022, Bank of Canada announced its decision to again increase the Overnight Rate but this time around the increase is only by 0.50%. After the September CPI announcement, economists were expecting a 0.75% increase and so this is an interim relief. However, BoC has indicated that because of elevated inflation, inflation expectations and demand pressures in the economy, the policy interest rate will need to rise further. This means that we will most likely see a similar increase on 7th Dec 2022. You can find the entire press release by Bank of Canada here.
With today’s increase, the Prime Rate will jump to 5.95% and so far in 2022 (present rate hike cycle) Bank of Canada has increased the Overnight Rate and thereby the Prime Rate by a total of 3.50%. 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). If it ends up that your payment is not able to cover the ongoing interest costs, your bank may soon be reaching out to adjust your payment / mortgage balance / convert to fixed.
Note: Prime Rate will increase to 5.95% at most lenders after this update (except for TD which should be at 6.10%). 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. The difference in Fixed and Variable rate mortgages is on average down to 0% to 0.15% depending on the mortgage type (Prime Mortgages only).
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 14 bps at 3.466% from where they were 8 weeks ago (3.324%). Since my last update, the yields saw a high of 3.896 on 20th October and a low of 3.161% (intraday) on 12th September. As things stand today, yields have risen by nearly 3.15% from the lows witnessed in July 2020 when they stood at around 0.302%. The bond yields had risen dramatically ahead of the Bank of Canada announcement and with the lower than expected increase, there has been a sudden drop in yields in the last 2 or 3 days (as much as 50 bps).
The lowest 5-year fixed for a purchase with a 20% downpayment is now in the range of 5.00% to 5.50% OAC (up by 20 ~ 50 bps since Sept 2022). While an insured mortgage (less than 20% downpayment) can be secured in the range of 4.85% to 5.25% OAC (up by 30 to 50 bps since Sept 2022). For rental properties, the range is between 5.65% to 6.00% OAC (up by about 30 bps since Sept 2022). For the shorter term (1-3 year) mortgages, the increase in rates has been much more significant and are priced higher than 5-year rates in most instances. My recommendation would be to go with shorter terms over 5-year term despite higher costs in the near term.
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.
Your Mortgage Playbook for 2022-23
As we approach the end of the year, the economic turmoil that we have been experiencing for a while appears to be intensifying rather than subsiding. The central banks around the world have been aggressively moving the policy rates and it's affecting all of us but in different ways. Many of you might be wondering what’s to be done to insulate yourself from this situation and what price should you pay for doing so (there is always a cost). This article is an attempt to help you start thinking about what you could do.