Prime Rate has increased to 6.45%
As of 10 a.m. on December 7th, 2022, Bank of Canada announced its decision to again increase the Overnight Rate but this time around the increase is by an unexpected 0.50%. After the recent softening in CPI and messaging by Bank of Canada, economists were expecting a 0.25% hike, but today’s announcement just indicated that Bank of Canada wants to squish inflation for once and doesn’t want to leave a change that it crops back up. You can find the entire press release by Bank of Canada here.
With today’s increase, the Prime Rate will jump to 6.45% 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 4.00%. 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, but this is probably the maximum pain that you will endure. Most likely BoC will not hike at its January meeting but keep rate steady while watching how Canadian economy fares and if we witness any inflation which is imported from the USA.
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 6.45% at most lenders after this update (except for TD which should be at 6.60%). 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).
Over the last 6 weeks, the spread between fixed-rate and variable-rate mortgages has inverted with fixed rates being lower than variable rate mortgages. This is the first time such an inversion has taken place in this rate cycle, and this usually signifies that a top has been received or that we are in touching distance.
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 lower by about 41 bps at 3.057% from where they were 8 weeks ago (3.466%). Since my last update, the yields saw a high of 3.764% on 6th November and a low of 3.006% on 1st December. As things stand today, yields are much below their peak of 3.896% (seen on 20th Oct 2022) and still declining. However, it’s still about 2.75% higher than the lows witnessed in July 2020 when they stood at around 0.302%. For now, 3% level seems to be holding.
The lowest 5-year fixed for a purchase with a 20% downpayment is now in the range of 5.10% to 5.30% OAC (down by about 20 bps since Oct 2022). While an insured mortgage (less than 20% downpayment) can be secured in the range of 4.75% to 5.00% OAC (again down by about 20 bps since Oct 2022). For rental properties, the range is between 5.65% to 5.90% OAC (steady since Oct 2022). For the shorter term (1-3 year) mortgages, the rates have remained steady and premium over 5-year rates is increasing. Still, my recommendation would be to go with shorter term (1 or 2 year) 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. At current rates, you are bound to qualify for a higher mortgage going with a shorter-term fixed rate mortgage.
Navigating the current environment
As we approach the end of the year, the economic turmoil that we have been experiencing for a while appears to be broadening rather than narrowing. There is much talk about the economy going into a recession next year and unemployment levels increasing from their historic lows. The central banks around the world have aggressively increased their policy rates and increased the cost of borrowing. Those of you seeking a new mortgage, with an existing variable rate mortgage or with mortgages coming up for renewal might be wondering about the strategy that they should adopt. While there is no substitute for a personalized discussion with your agent or advisor, its good to be aware of the options available to you. This article is an attempt to help you start thinking about what you could do.
How can you profit?
For those of you who are thinking of the long term and are on a financially sound footing, the current setup can offer you bountiful opportunities. Stock markets are down, bond prices are low, Interest rates are higher (so fixed income is good) and real estate market is holding ground. This is probably the best time in a decade to find qualify assets (choose your pick) and buy them at a good price. The icing on the cake is that you can do so while paying down your higher cost mortgage (on principal home) debt faster and get a bigger tax refund from CRA each year.
Ask me how!