Bank of Canada: Prime Rate Announcement, March 2

We know…. Change can feel stressful. The Bank of Canada announced a Prime rate increase of .25% this morning. The increase was expected. The BoC is attempting to cool inflation. We expect at least one more .25% increase in 2022, possibly two increases by year end.

Our thoughts – Stay calm and carry on in your variable rate mortgage!

We believe that variable rate mortgages continue to be a wise decision.

Here’s why:

Variable rate mortgage holders have exceptionally low interest rates and if a home needs to be sold (due to life, relationship, health, or employment circumstances), the mortgage breakage penalty amounts are very low compared to fixed rate penalty amounts. Essentially, a mortgage holder, can end or break a variable rate mortgage anytime during the five year term with little breakage penalty cost.

If a mortgage holder has a fixed mortgage rate, and they need or want to sell their home, and they do not intend to purchase a new home, they will have a fairly high mortgage breakage penalty. Fixed rates can reduce a home owners ability to sell a home if that penalty amount is too high. The sale proceeds must pay their real estate fees, pay out the mortgage balance, and pay the mortgage breakage penalty. Variable rates ensure very low mortgage breakage penalty amounts, generally three month’s of interest costs. Fixed rates can be ported to a new property but there are fine print rules around porting a fixed rate that can make it a challenge including timelines for selling and buying. It’s important that if you intend to sell and buy a home and are considering porting a mortgage rate that you make sure you are pre-approved. We will also review the policy around porting the existing rate to avoid a fixed rate mortgage breakage penalty.

Variable interest rates will slowly increase over time. There is no doubt about it! Compared to the best five year fixed rates in the market, variable rates are at almost half of the interest cost. Wow. For example, a variable rate may be between 1.30% to 1.65% and a fixed rate is between 2.99% and 3.24%. This allows for up to six movements in Prime for all variable rate mortgage holders before we hit the fixed rate we may have considered.

We have a variable interest rate hack – our clients are advised to pay their mortgage payment (and adding an additional payment to principle) to match what the fixed rate payment of the day was. That fixed rate was far higher, the mortgage payment would have been higher based on that rate. Maybe that’s $100 a month, maybe that’s $250 a month. This amount depends on the size of the mortgage. Consider the variable rate, pay the mortgage as if you took the fixed rate and you are getting the best of both world – a lower mortgage payment, reduced interest costs, and the security of being prepared for payment increases, and a considerable amount of funds going towards paying down the principle of the mortgage.

Our clients are always advised to take action and are ready for rate increases because they already pay more than needed! They are proactively engaging in peace mind, while obtaining a great rate!

We have a detailed plan for every client we work with. That plan includes the interest rate decision and the exit strategy (yes, we plan for how and when our client’s may break their mortgage and sell their home, transfer to a new lender, or refinance).

If we can assist with mortgage advice or if you want to talk through the Prime rate increase please don’t hesitate to reach out. We are here to help.