What a 0.50% Rate Increase Means to U

In Stories by Vancouver Mortgage Broker

Variable Rates will see an increase of 0.50% in the coming days

This morning the Bank of Canada (BOC) increased it’s overnight rate by 0.50%.

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)

The Bank of Canada says the following justifying the increase:

“In Canada, growth is strong and the economy is moving into excess demand. Labour markets are tight, and wage growth is back to its pre-pandemic pace and rising.”
“The Bank forecasts that Canada’s economy will grow by 4¼% this year”
“CPI inflation in Canada is 5.7%, above the Bank’s forecast in its January Monetary Policy Report (MPR). Inflation is being driven by rising energy and food prices and supply disruptions, in combination with strong global and domestic demand.”
“There is an increasing risk that expectations of elevated inflation could become entrenched. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well-anchored.”

Are variable rates going to continue to rise?

Most certainly.

The Bank of Canada also said today:
“With the economy moving into excess demand and inflation persisting well above target, the Governing Council judges that interest rates will need to rise further.”

How much more they will rise we don’t know.

My forecast is another 0.75% through the course of the next 12 months.  With most variable rates currently sitting in the 2.00% to 2.50% range this would bring variable rates to 2.75% to 3.25%.

Bankers forecasts are as follows:
Conservatively: National Bank forecasts:
End of 2022:  Overnight rate 1.50% (prime rate 3.70% and variable rates 3.00%)
End of 2023:  Overnight rate 1.75% (prime rate 3.95% and variable rates 3.25%)
Aggressively:  Scotiabank forecasts:
End of 2022:  Overnight rate 2.50% (prime rate 4.70% and variable rates 4.00%)
End of 2023:  Overnight rate 3.00% (prime rate 5.20% and variable rates 4.50%)

Today’s overnight rate is 1% (prime rate with most banks is 3.20% and variable rates are in the 2% to 2.50% range)

But forecasts are just that, forecasts.  Always do what’s best for you.

When will variable rates fall again?

Historically, what go’s up must come down.

The Bank of Canada also said today:
Russia’s ongoing invasion of Ukraine is causing unimaginable human suffering and new economic uncertainty.”
“Housing market activity, which has been exceptionally high, is expected to moderate.”
“The Bank forecasts that Canada’s economy will [slow] to 3¼% in 2023 and 2¼% in 2024.”
CPI Inflation “is expected to ease to about 2½% in the second half of 2023 and return to the 2% target in 2024”

While the BOC was very firm with it’s messaging that the current economic environment justifies more rate increases to come, they also noted economic vulnerability.

Typically, stronger economic indicators (as we currently have) justifies rate increases and weaker economic indicators justify rate decreases.

The largest rate increase we’ve seen recently was 1% from 2017 to 2018 and then rates held before falling again.  There’s no indication that that will be the case today, however that is in alignment with some economic forecasts.

Fixed Mortgage Rates Rise

Fixed mortgage rates are up.

The BOC is ending their bond buying program.  This program has kept fixed mortgage rates low.
“The Bank is also ending reinvestment and will begin quantitative tightening (QT), effective April 25. Maturing Government of Canada bonds on the Bank’s balance sheet will no longer be replaced”

Lenders have been aggressively increasing fixed interest rates in anticipation of today’s announcement.

Here is an example of one of Canada’s big banks 5 Year Fixed Rate increases in the last few weeks:
Feb 18:     3.24%
March 3:   3.34%
March 11:  3.44%
March 19:  3.69%
March 25:  3.89%
April 6:       4.09%

With fixed rates increasing to these levels those taking new mortgages are tending to lean towards variable rates for 2 reasons:
(1) New variable rates are currently approx 1.50% lower than fixed rates.
(2) Borrowers qualify for more mortgage on a variable rate as affordability is reduced for interest rates over 3.25% (due to the stress test)

With these changes in rates you may be thinking if you should lock in or stay variable.  Included is a piece written in a previous communication which you may find helpful at this time…

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% interest rate range, 5 year fixed rates are in the high 3% 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 5 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.