Prime Rate has increased to 6.95%

As of 10 a.m. on June 7th, 2023, Bank of Canada announced its decision to raise the Overnight Rate (aka Policy Rate) by 25 bps / 0.25% at its fourth meeting for 2023. This increases the Policy rate to 4.75% from 4.5% and as a result Bank / Lender Prime Rate would increase to 6.95%. You can find the entire press release by Bank of Canada here.

Bad news for those of you with a variable rate mortgage/ borrowing is that this would be the 10th increment in the last 15 months and the stability in your monthly payments lasted only for about 5 months. Now, we wait to see what Bank of Canada decides on its next meeting on 12th July 2023. Hopefully, we will witness the softening in economic data which BoC has been anticipating eagerly!

Since the last update on 12th April 2023 but before today’s announcement, the spread between fixed-rate and variable-rate mortgages had decreased by 10 to 30 bps (depending on the mortgage type and lender) as fixed rates increased recently. Fixed rates continue to be lower than variable rates and this inversion (Fixed Rate being lower than Variable rate) has persisted for about 26 weeks now. In a normal rate cycle, such an inversion doesn’t persist for more than a few months, and we are currently into the 7th month of this inversion!

Mortgage Interest Rates

As you know the 5-year Fixed-rate mortgages in Canada follow the 5-year bond yields and right now those bond yields are at 3.547% (only marginally lower than the high of 3.612% witnessed on 7th March 2023). Since my last update, the yields saw a high of 3.607% on 28th May on account of higher than estimated GDP growth figures, low un-employment rate, etc. These have caused bond yields to rise dramatically from the low of 2.869% seen on 2ndMay as the bond market expects Bank of Canada to raise the policy rate and keep rates higher into 2024. This increase has been passed on by the lenders and is reflected in the higher Fixed Rate mortgage interest rates quoted by the lenders these days.

Checkout the charts below to get an insight into the various trends playing out for mortgages with a 5-year term (Fixed and Variable).

Trend - 5-year Mortgage Rate

The chart above shows the trend in interest rate for the major types of mortgage products (Fixed and Variable) for the last 20 months or so. For the shorter term (1-3 year) mortgages, the rates continue to be at a a premium to corresponding 5-year rates.

Spread - Fixed Vs. Variable Rate Mortgage

Generally, Fixed rate mortgage rates are higher than their corresponding Variable Rate mortgages at the time of securing one but currently we are in a phase where the relationship is inverse. This typically happens when the interest rate trend is under reversal. There is no guideline as to how long such an inverse relationship can persist but in "normal" times this period is limited to couple of months at best. This inversion is into the 7th month currently.

Discount to Prime Rate

When somebody secures a Variable Rate mortgage, the only aspect that is held constant is the discount to Prime Rate (and fixed payments in some instances) that they enjoy. However, the actual interest rate and interest costs change as Prime Rate changes. The above chart depicts the trend with pricing or discount that lenders are offering on such variable rate products. A higher discount generally depicts a higher demand for variable rate mortgage and how the competition between lenders is responding to corresponding demand and vice-versa.

So, while all of this is taking place in the macro-environment, how are you adjusting your finances for the long term??

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