Hi everyone, and welcome back to the blog. I’m Michele Ellis, Senior Mortgage Broker here at the Mortgage Studio, and today I’m going to address last month’s Bank of Canada overnight rate hike. On July 12th, the BoC raised this rate for the first time in 7 years – by a standard quarter point – from 0.50% to 0.75%.
First, a quick refresher on what this means. From the Bank of Canada website, the overnight rate is “the interest rate at which major financial institutions borrow and lend one-day (or ‘overnight’) funds among themselves.” In practice, this rate is mirrored by the Big 6 Banks, who set their own prime rates – the ones that affect variable mortgage rates and consumer loans – in general lockstep with the BoC. Such is the case here, where within a few hours of the Bank of Canada’s announcement, the Big 6 Banks increased their prime rates equivalently from 2.70% to 2.95% (though it’s worth noting that in 2015, when the BoC lowered its overnight rate by 50 basis points, the Big 6 Banks broke tradition by cutting their own rates by only 30 points – meaning that for Canadian consumers, interest rates are still 20 basis points higher than they should be).
So what does an increase in these interest rates mean for you, a homeowner or potential homeowner? For now, it means a slight increase in variable rate mortgages and lines of credit; fixed-rated mortgages, of course, won’t be affected until they come up for renewal. Via CBC, Bank of Canada governor Stephen Poloz points out that “you need to preface [the increase] with an acknowledgment that of course interest rates are still very low.” This is true – interest rates are still incredibly low (consider that this time 10 years ago, in August 2007, the overnight rate was a full 4.5%). That said, Canadian Mortgage Trends predicts that “the Bank of Canada isn’t through with its rate hikes just yet,” and goes on to forecast that “the bank will raise rates again at its October meeting, with potentially more to follow in 2018.”
In that light, which questions should you be asking and which actions should you be taking? If you already have a mortgage (variable or fixed) and are concerned that this hike will affect your future ability to pay, I urge you to give me a call so we can talk about your options (whether or not to convert, what the pros and cons are of breaking a fixed mortgage, etc). If you don’t yet have a mortgage but have been looking around for homes or think you might soon, I would again advise consulting with a professional mortgage broker such as myself. Whether it makes sense to jump into the market now or hold off despite potential future rate increases depends entirely upon your goals and personal financial situation. And if you are ready to take that next step, I can arrange a pre-approval to prevent your rates from increasing in the short term (no matter what happens with the rest of the market). Finally, if all you want is more information about the overnight rate and what it might mean for you down the line, I offer my 20+ years of experience in the Canadian finance and mortgage industries completely free. Just pick up the phone and give me a call at 604.892.4647 – no strings attached.
For more up-to-date mortgage news and advice – and to keep up with new blog posts – follow me on Twitter @Mortgage_Studio. Until next time, enjoy the rest of your summer!
Michele Ellis – Senior Mortgage Broker, The Mortgage Studio