Understanding Today’s Rate Increase

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

Bank of Canada Increases Rates by 0.75%

The Bank of Canada (BOC) changed it’s overnight rate to 3.25%, an increase of 0.75% bringing prime rate with most lenders to 5.45%.

The BOC is on a mission to curb inflation and had the following to say to justify the increase:

“The effects of COVID-19 outbreaks, ongoing supply disruptions, and the war in Ukraine continue to dampen growth and boost prices [globally and in Canada]”
“Surveys suggest that short-term inflation expectations remain high. The longer this continues, the greater the risk that elevated inflation becomes entrenched.”
“The Canadian economy continues to operate in excess demand and labour markets remain tight.”

Are variable rates going to keep rising?

They could.  But it seems like we are at or are approaching the peak.

The BOC stated today “Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further.” 

Markets are currently pricing in an overnight rate maximum of 3.50%, which we are .25% away from.  Forecast is then for interest rates to stay the same with the potential to come down at some point in 2023.

Here’s a 12 minute a video with David Rosenberg which will help provide perspective:  FINANCIAL POST INTERVIEW

Effects on current variable rate holders

For borrowers on ADJUSTING PAYMENT variable rate mortgages, payments will increase approximately $45/monthly per $100,000 of mortgage.  This may start to cause cash flow issues for some households and those feeling the pinch should call in to discuss solutions.

For borrowers on FIXED PAYMENT variable rate mortgages, amortization extends and more of the mortgage payment is applied to pay interest.
– For those who have had their mortgage for 2 or more years should be ok as they benefitted from super low rates during covid.  A mortgage review is encouraged.
– For those who obtained their mortgage within the last 2 years may be at risk for their mortgage payments to be forced higher.  This occurs when the “trigger rate” is hit which has been highly covered in the media…

Trigger rate

Trigger rate is when interest rates rise so much that a borrowers payment no longer covers the interest owed with each payment.  When this happens lenders can mandate higher monthly payments or request a lump sum of money to ensure interest is being covered.

RBC reported that over 80,000 of it’s mortgage holders will be in this situation with today’s rate hike.  Lenders will communicate individually with borrowers.

Contact us if your lender reaches out to discuss the lenders proposal or if you are concerned that your payment may not be covering interest.

Borrowers can find their trigger rate by entering their original mortgage details in our mortgage app: https://cma.me/approveu (under the Simple Mortgage Calculator option)

Fixed rates are stable at their highs

5 year fixed rates are sitting in their 4.50 % to 5.50% range.  There has been some pressure off of fixed rates and some lenders have lowered theirs however there hasn’t been any major movement.

With today’s hike variable rates are nearing fixed rate pricing making the decision to take a fixed vs variable more difficult for borrowers.

Some suggest locking in today with rates at their highs is not a wise idea however each household is encouraged to get individualized advise to ensure decisions are in alignment with their goals, needs and risk tolerance.

Home buyers are now approved for lower purchase prices

Today’s rate increase reduces home buyers purchasing power by approximately 8%

During COVID all buyers were qualifying for their mortgage at a Stress Test rate of 5.25%.
With rates up many buyers are needing to qualify at a Stress Test rate over 7% (even though their contract rate may be 5%).

Active home shoppers will need to revisit their pre-approvals to ensure they still qualify for the same purchase price.

I acknowledge that none of this sounds positive but rates move in cycles and this will pass!  Here’s a cute video that will put a smile on your face:  BABY LAUGHS

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