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10 Jul

Rates are NOT rising- well, not the way you think-UPDATED


Posted by: Joel Olson

UPDATE: The Bank of Canada has increased their overnight rate to .75% as of July 12, 2017.

Despite many articles predicting interest rates going up. They are not. Well, not in the way you think.

This week the Bank of Canada will meet, as they do several times over the year to determine if its necessary to increase the Bank of Canada Prime Rate.  They have not done so since 2010. Although, it is yet to be confirmed- there is a possibility that this could in fact be the time they do exactly that.

The prime rate effects every variable rate mortgage, line of credit, investment in Canada. This alone is one of the major reasons that this decision is made with extreme caution. Essentially, in a very broad view the Bank of Canada rate is related to how much a bank pays to obtain and access funds. The bank then has their own prime rate that is directly linked to the Bank of Canada. Almost 100% of the time these prime rates match. However, last time the prime rate went down, it worthy to note that the banks didn’t pass on the discount right away, and they still do not pass on the full discount. The major bank world of Canada is small though- so their is very little room for difference between the major banks on these things, without the prospect of losing instant market share.

So, lets then assume that prime rate is increased, and the banks raise their prime rate to match that. That is likely what would happen. This means that if you have a line of credit or a variable rate mortgage that your interest rate will increase. The Bank of Canada hasn’t increased prime beyond .25% in over 25 years. So, let’s prepare for doomsday, if you have a $500,000 mortgage, your payment would in the most extreme examples increase by $62 per month. Obviously, as balances will be even lower for most people- that increase will be even less. To further frame this,  it is a little know fact, that many variable mortgages do not increase the payments. This means that your payment remains the same, but the ratio of principal to interest changes, so the risk of a rising payment is eliminated. The other thing to remember is that with a higher prime rate- its often a case that lender will create even bigger discounts on variables.

But- why bother? Still seems risky to you. The value of having a variable still will outweigh a fixed rate in many situations- here is a great rundown of that, but a great mortgage broker friend of mine

Life Is Variable, Perhaps Your Mortgage Should Be As Well


In any case, the world of interest rates has changed lots in the past twelve months. Be worried of anyone quoting you a mortgage rate after a brief two minute conversation. There is much to consider for your life, situation, future and also many terms on mortgages that restrict you in a way that it is unlikely you would even ask.