Desmond Brown

INTEREST RATE INCREASE šŸ˜±šŸ“ˆ Should we be concerned?

05 February 2018
Desmond Brown

Two weeks ago Bank of Canada raised its prime lending rate 0.25% points. As a result we're now seeing posted bank rates for five year mortgages at 4.64%.

Experts are predicting the Bank of Canada will raise the prime rate a few more times over the next twelve months. With the average price of a home in Toronto at $730,000, the media reported that this was the beginning of the end for home ownership in this city and that people are now in danger of losing their homes. Not true.

The federal government has taken many steps over the past few years to prepare for a rise in interest rates or a slump in the economy and/or real estate market. One measure is the recent stress test where mortgage borrowers must qualify two percentage points more than Bank of Canada's 5 year benchmark rate.

Many of my clients have opted for the variable rate for their mortgages, which is a three or five year term and allows the option of locking into the fixed rate.

If you currently have a variable rate mortgage and you're thinking of locking in, my colleagues at the Dominion Lending Centre say you should consider the following:

Consider your long term plans. If you have any intentions of breaking your current mortgage by selling your home, or refinancing Ā to renovate or help with your children's education, stay with the variable rate.

Anytime you cancel or discharge a mortgage before the end of its term, you are subject to a penalty. The penalty to break a variable mortgage is three month's interest.

The Prime Rate typically increases in increments of 0.25%. The impact to a personā€™s monthly mortgage payment with an increase of a quarter percentage point about $14 per month, for every $100,000 borrowed. For example, if you have a mortgage of $500,000, you will see your mortgage payments increase by approximately $70 per month.

While some people will be able to withstand the increase to their monthly payments, others may not and would rather lock in to a fixed rate to have a bit more certainty knowing what their payments will be for the remainder of their term, regardless of what Bank of Canada decides.

If you're considering locking in your variable mortgage rate for the remainder of its term, contact your financial institution.

As always, if you have any questions or need a mortgageĀ specialistĀ to help you, please feel free to get in touch.