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The Bank of Canada Raised its Key Interest Rate by 0.25% Today!

As everyone know, The Bank Of Canada Raised its Key Interest Rate by 0.25% Today as it was expected! What does it mean to you as a client?

If your Mortgage is FIXED, there is no change for you!

If your Mortgage is VARIABLE, Don’t Panic! Please see the illustration below for 25 years amortization with semi-annual compounding period.

The monthly payments on a $500,000 mortgage with Variable Rate at 1.50% was previously $1,998.59 per month. A 0.25% increase in rate to 1.75% increases your payments to $2,057.43, which is a difference of only $58.84 per month. If you have a static payment variable rate, your payment won’t change at all.

If you were to lock yourself into a 5-year Fixed Rate at 3.29%, an average 5-year fixed rate in the industry right now, your monthly mortgage payment would be $2,441.25. That is a difference of $383.82 per month, or $4,605.84 per year!

In addition to this $383.82 extra per month, you would be changing the flexibility of your mortgage. If you ever need to break a Variable Rate Mortgage, the penalty is just 3 months of interest (around 0.5% of your mortgage). In contrast, penalties for breaking Fixed Rate Mortgages are determined using the “Interest Rate Differential”, a calculation that can be up to 4.5% of your mortgage balance!

The Bank of Canada would have to raise their Key Interest Rate SIX times before you arrived at where Fixed Rates are right now, as they usually move their rates in increments of 0.25%. It’s important to keep in mind that the Bank of Canada makes just 8 rate announcements per year.

Prime Rates with the lenders will likely rise from 2.45% to 2.70% today. The highest Prime Rate has been in the last 12 years is 3.95%…only 1.25% higher than today. Lenders often give discount on prime rates. I’ve done the calculations, and even if the Bank of Canada increases their rate by 0.50% per year for the next 5 years, you will still come out thousands of dollars ahead with a variable rate mortgage right now. Remember, the Banks LOVE Fixed Rate Mortgages, and would love to see you locking into those fixed rates right now. Historically, Variable Rate Mortgage holders have always “won” the rate game. So…Don’t panic! Keep calm, stick with your strategy, and love your mortgage.

NOW is the time to be taking advantage of this ultra-low rate environment!

Even if you are concerned, just put aside that $383.82 per month into a savings account, or Use your prepayment privileges that came with your mortgage to make extra payments to pay down your mortgage balance quicker.

And

CONGRATULATIONS on all of the money you have been saving!!