Rates up again, more hikes to come?

In Bank of Canada, Interest Rate Trends by Vancouver Mortgage Broker

Bank of Canada Increases Rates by 0.50%

Variable Rates will see an additional increase of 0.50%

This morning the Bank of Canada (BOC) changed it’s overnight rate to 1.50%, an increase of 0.50%.  This is the 3rd straight increase in as many meeting and brings prime rate to 3.70%.

For variable mortgage (and line of credit/loan) holders, this will increase their current rates by 0.50% in the coming days.

This will increase borrowers payments.

(Payment difference will depend on amortization remaining and current rate)

(Payment difference will depend on current rate)

Payments don’t change with certain variable mortgages and in this case borrowers will see their amortizations extended by approximately 2 years.

Lenders will communicate changes to borrowers specific mortgages within the next 30 days typically by mail or an online banking notification.

The Bank of Canada says the following justifying the increase:

“Inflation globally and in Canada continues to rise, largely driven by higher prices for energy and food.”
“The Russian invasion of Ukraine, China’s COVID-related lockdowns, and ongoing supply disruptions are all weighing on activity and boosting inflation.”
“Canadian economic activity is strong and the economy is clearly operating in excess demand.”
“Housing market activity is moderating from exceptionally high levels.”

What’s the latest perspective on further variable rate increases?

The Bank of Canada said today:
“The pace of further increases in the policy rate will be guided by the Bank’s ongoing assessment of the economy and inflation, and the Governing Council is prepared to act more forcefully if needed.”

This is a very firm tone from the Bank of Canada suggesting they won’t hesitate to increase rates again if needed.

Note this is the same organization that had a confident tone in the past when they stated they would hold interest rates low into 2023.  So today’s perspective could change as economic conditions unfold.

Some are predicting a small additional increase from the BOC, others are predicting another 1% into 2023.

The Bank wants to increase interest rates to help control inflation, but will this work?

Interest rates, inflation and the housing market

Joseph Stiglitz (a Nobel Prize in Economic Sciences winner) says “raising interest rates is not going to solve the problem with inflation.”

Raising rates isn’t going to create more food to bring prices down.  Raising rates isn’t going to bring gas prices down.  Stiglitz suggests that the primary way to solve inflation is by resolving supply issues.  This is proving tough with ongoing supply disruptions (Ukraine Russia conflict, COVID lockdowns, etc)

An additional consideration is many business owners are still in debt coming out of COVID.  Many are on variable rate lending.  Raising rates increases business owners monthly payments and costs.  As business owners costs rise, the business owner is forced to increase prices, which means higher prices for consumers, which in effect causes higher inflation.

Raising rates does slow down demand however.  And we have seen this in the Greater Vancouver housing market already.

One of the Banks goals is also to “moderate housing activity” which they have been successful in with the rate hikes to date, and today’s hike could have a further cooling effect.  Problem with this is the Bank does not want the housing market to cool too much as it is one of Canada’s major economic drivers.  Slowing economic activity would then force rates lower again.

While we could see additional rate hikes, there’s no doubt the Bank of Canada has a juggling act to perform.

What should home shoppers do?

Those that are shopping for homes should lock in an interest rate immediately.

Buyers can secure a mortgage rate for up to 4 months.  This also applies to any existing homeowners that are planning additional borrowing in the coming months.

Locking In A Variable Rate
While consumers can’t secure Prime Rate as that is set by the Bank of Canada.  Consumers can secure their discount off of Prime Rate to increase their chances of a lower variable rate.  We are seeing discounts shrink at the lenders so the sooner the better.

Locking In A Fixed Rate
Shared previously was this example of one of Canada’s big banks 5 Year Fixed Rate increases in the last few weeks and we have added today’s rate:
Feb 18:     3.24%
March 3:   3.34%
March 11:  3.44%
March 19:  3.69%
March 25:  3.89%
April 6:       4.09%
June 1:      4.64%
We are seeing rate increases slow however timing is of the essence as there is no guarantee.

To lock in a rate fill in the online form at https://approveu.ca/apply/  and you will be contacted within 4 business hours of receipt.

With today’s changes in rates, including a piece written in a previous communication which you may find helpful if trying to determine if you should lock in or stay variable…

Should Borrowers Move Their Variable Into Fixed Mortgage Rates?

Most variable rate mortgages allow you to convert into a fixed mortgage rate at anytime.   Is that the best thing to do at this time?  3 questions to ask…

What are your goals?  Variable rate holders have the luxury of paying out or changing their mortgage at anytime without facing large penalties.  This allows flexibility for any goal changes or unexpected events that arise in life.  Fixed rate mortgages can come with $20,000, $30,000, $50,000 or higher penalties (depending on a number of factors) which could affect future decisions.  Over the years we have seen this affect those looking to sell & buy, renovate, invest in rental properties, consolidate debt, leveraging equity during illness, and the list go’s on.  So before you lock in ensure you are clear on your goals during the locked in term and any possibilities that could arise financially.

What could you lock into?  Call your mortgage lender and ask what your rate would be to lock into.  Currently variable rates are in the 2.50% to 3.00% interest rate range, 5 year fixed rates are in the 4% range.  In this case the Bank of Canada would need to increase interest rates by 1.50% to get to the level of the fixed rate.  If considering locking in, contact your lender and email us with the options they provide so we can advise if there is any additional negotiating room.

How fast will rates rise?  Scroll up in this email to see forecasts.  The Bank of Canada has 4 more meetings in 2022 where they will decide on whether to hold or increase rates.  If you will be stressed out with every news announcement about rates where you can’t sleep at night then you may want to consider locking in.  If you can “keep calm and carry on” hearing news releases then you may want to stay variable.  Nobody has a crystal ball knowing exactly where rates will go, so it’s important to make the best decision for you.

Please reach out anytime and feel free to share this email with anyone you think will find it useful.