Canadian mortgage rates just went up
This past Tuesday, the Bank of Canada decided to keep their overnight rate unchanged at 3% despite analyst expectations of a 25-basis-point cut to help stimulate our economy. It seems the BoC now has its sights set on fighting inflation. How does this affect mortgage rates?
From the Bank of Canada site:
The Bank carries out monetary policy by influencing short-term interest rates. It does this by raising and lowering the target for the overnight rate.
The overnight rate is the interest rate at which major financial institutions borrow and lend one-day (or “overnight”) funds among themselves; the Bank sets a target level for that rate. This target for the overnight rate is often referred to as the Bank’s key interest rate or key policy rate.
Changes in the target for the overnight rate influence other interest rates, such as those for consumer loans and mortgages. They can also affect the exchange rate of the Canadian dollar.
This rate affects banks’ prime rates. Banks’ variable mortgage rates are based on prime. Our current variable-rate mortgage happens to be at prime less 0.75% (currently 4.00). Fearing the end of rate cuts and the start of the fight against inflation (monetary policy dictates raising rates to fight inflation), I decided to ask our mortgage broker about 5-year fixed rates. He was able to get our lender to pre-approve us for a 5-year fixed rate of 5.15% - a 1.5 percentage-point discount off their posted rate of 6.65%.
Then just today, the major lenders increased their 5-year fixed rates a full 50 basis points. Our lender increased its posted rate from 6.65% to 7.15%. Assuming a discount of 1.5 percentage points off the posted rate, our rate would have been 5.65%. This half-percent difference would have cost us $9,000 in interest payments over the 5 year term based on our principal balance and payment frequency (*)! I’m feeling so good now! Thanks to Anna and Wayne for hinting at possible rate increases and getting me to think about locking in. With gas and food prices skyrocketing, it’s nice to have some sense of certainty.
Our pre-approval is good for 4 months so it’s time to kick our house-hunting up a notch.
* A good Excel-based mortgage calculator can be found here:
http://www.vertex42.com/Calculators/Canadian-mortgage.html
