On July 12, we saw the first rate hike from the Bank of Canada. The rate was raised 0.25% from 0.5% to 0.75%. This was the first increase since September 2010 and more will come this year. What do these increases mean for your fixed or variable rate mortgage?
Your home may be the biggest purchase of your life, and anything that could affect the amount you are paying each month is important.
For a Fixed Rate Mortgage:
- Payments for current homeowners stay the same
- The interest rate on this type of mortgage is fixed so no matter what the Bank of Canada does, your rate will not change until your mortgage is up for renewal.
- Increase at mortgage renewal
- If you are at the end of your mortgages’ term, you will have to renew and your rate will change accordingly. This is not all bad news as the rate that you initially had at the start of your term (typically 5 years) may have been higher than the current rate is—even with the rate increase. To check what your future mortgage payments might be, I suggest using GLM Mortgage Groups’ Mortgage Calculator.
- Higher Rate for Prospective Homebuyers
- First-time home-buyers may have a higher rate if they are applying for a mortgage. Remember that the Bank of Canada will raise their rates in small increments (0.25%) at a time. Also, each increase translates into around $13 per $100k—an increase that most people can afford (though it may mean sacrificing a coffee run or two per week).
Variable Rate Mortgages
- Your Payments Will Increase
- A variable rate mortgage moves up or down with the general level of interest rates in the economy. This recent Bank of Canada hike means your mortgage payments will go up, but the amount you will be paying will be affordable, working out to around $13 per 100k
- Should you switch to a Fixed Rate?
- Deciding to lock into a fixed rate mortgage, depends on your ability to handle an increase in interest rates over time. Historically, borrowers who stay in a Variable Rate Mortgage (VRM) tend to save more money over the course of the term. It is important to make an informed decision and to understand how Variable Rate Mortgages work. Locking into a fixed rate may cost you more money than what an increase in your VRM would be.
The Mortgage Payment Calculator can show an estimated mortgage payment based on a new rate.
So there is no need to panic about these interest rate increases. It is important to stay informed and to budget for them. The effect these increases will have on the real estate market remains to be seen. This increase was the first one since 2010 but as we continue to get information we will keep you updated! If you have any questions, please contact Young Real Estate Group and we can put you in touch with the best professionals out there to help you navigate these mortgage rate changes.