Your Variable Rate Interest costs remain the same!

As of 10 a.m. on January 26th, 2021, contrary to popular opinion of a majority of economists and talking heads on TV, the Bank of Canada has maintained its Overnight Rate. The immediate takeaway for those of you with a variable rate mortgage/ borrowing is that your interest costs remain the same till 1st quarter/ begining of 2nd quarter of this year.

Key excerpts from the update from Bank of Canada this morning were:

1. Global recovery from COVID-19 pandemic is strong but uneven.

2. After GDP growth of 4½ % in 2021, the Bank expects Canada’s economy to grow by 4% in 2022 and about 3½ % in 2023.

3. As supply shortages diminish, inflation is expected to decline reasonably quickly to about 3% by the end of this year and then gradually ease towards the target over the projection period. Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target.

4. BoC has decided to end its extraordinary commitment to hold its policy rate at the effective lower bound (i.e. 0.25%). Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target.

Overall, it looks like BoC wanted to hold on till its next meeting on 2nd March 2022 before starting to increase its policy rate and thereby your borrowing costs. This is inline with its messaging from the last update of 2021.

On the Mortgage interest rate front, Fixed-Rate mortgages have been witnessing steady increases since the last update and banks/ lenders have also started reducing the discount being offered on the variable rate mortgages. You can expect this discount to shrink as Bank of Canada hikes its Policy Rate. Right now, the spread between fixed-rate and variable-rate mortgages is about 1.30% on average across the various types of mortgages. As recommended previously, borrowers with variable rate mortgages would benefit from making additional payment (lumpsum or additional payments) to the tune of 1% higher than what they are obligated to make. This will help them reduce your mortgage outstanding faster and alleviate some of the impact from future rate hikes.

Fixed Rate Mortgages

As you know the Fixed-rate mortgages in Canada are priced off the 5-year bond yields and those bond yields have been way too choppy recently. Since my last update the yields fell all the way to 1.143% on 19th Dec (at the height of Omicron scare) before rising to a high of 1.724% (on 18th Jan) given the high inflation figures being reported. Since, then it has reduced a little bit to 1.62% levels. Accordingly, lenders have continued to adjust their price of Fixed rate mortgages through the last 6 weeks. The lowest 5-year fixed for a purchase with a 20% downpayment is now about 2.54% OAC (higher from 2.45% reported last). While an insured mortgage (less than 20% downpayment) can be secured for about 2.39% OAC (up from 2.25% from the last update). Currently, the lowest rates are being offered by Credit Unions (banks and lenders are at a much higher price).

Income required to pay off your mortgage

If you have gone through the cycle of buying a home, you should be very familiar with Mortgage Eligibility Calculators (These are basically tools that you will find on the websites of major banks/lenders/brokers which gives you a high level indication of one eligibility to secure a mortgage given a certain household income. Do try the calculator on my website as well). But have you come across a calculator which can show how much income you would need to earn in order to pay off the mortgage?

None of the banks/lenders/brokers generally talk about this topic as their key task technically ends once the mortgage has been disbursed. But I have a different view-point on this topic and my goal is for you to be able to pay it off quicker and in the most efficient way. Hence, I have created a calculator to address this gap.

So, why don't you give this a try. You might be quite surprised by the results.

You do not need to share your email address to use this calculator or view the results!

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