On Wednesday morning, the Bank of Canada announced a rate hike of 0.25% on the overnight lending rate. Lenders will be implementing the rate hike at different times over the next two weeks with all Prime rates increasing from 3.20% to 3.45%.
This being the third rate hike in a year, some clients will be wondering whether they should lock in.
The outlook is uncertain whether we can expect another rate hike or potentially rates falling again. There are a number of factors that could lead to either result and CIBC Chief Economist Benjamin Tal conducted a webinar on that subject yesterday afternoon. You can watch the webinar HERE. There is some economic-speak, but this is mainly in for the layperson and he does an excellent job of laying out all of the factors that have brought us to this point (including explaining a number of Donald Trump issues).
So to lock-in, or not to lock in, is that REALLY the question?
First, let’s breakdown what the actual payment increase most of you will realize once bank prime rate sets to 3.45% from 3.20%. The lenders typically change the rate the next month, so February 1st.
The Change to Your Variable Rate Mortgage +.25%
$100,000 your increase will be $12-$14 per month or $6 – $7 for bi weekly payments.
$200,000 an increase of $24-28 per month
$300,000 an increase of $36-42 per month
$400,000 increase of $48-56 per month
I guess you can take it from there.
“LOCKING-IN” means you are converting your variable rate mortgage to fixed rates, which will increase your mortgage rate by .75% over your current variable rate. So even if prime does a final move this year you will be paying a premium of .25% more than necessary for an additional 5 years. The other negative is – you will be maturing between US elections when rates are historically the highest like now.
If you decide to lock into a fixed rate it would translate to this:
$100,000 your payments would be increase $40-42 per month
$200,000 an increase of $80-84 per month
$300,000 an increase of $120-126 per month
$400,000 an increase of $160-168 per month
The fixed rate contract comes with different terms and conditions and can cost you more to discharge your mortgage in case you need to access your equity prior to maturity.
DO NOT LOCK IN IF:
- If you think you will be moving in the next 5 years.
- If you are planning renovations in the next 5 years.
- If you are increasing debt outside your mortgage.
In other words, if you think your living circumstances are going to change, do not lock in as you will be losing your flexibility.
If you’re still in doubt, you should call the office (905-546-0550) to confirm you are making the right decision. It is better to be safe than sorry.
We recommend not calling the lender to ask as they are highly motivated to lock you into an additional 5 years at a much higher rate. Remember, if they are making more money, they are getting it from you.
By Chris & Suzanne