BOC Update (Oct)

Bank of Canada Increased The Prime Rate by 0.50% - What should you do? 🏠

November 01, 2022

Hi ,

As you may have already heard the news last week, the Bank of Canada INCREASED the overnight interest rate by 0.50%. . The Bank of Canada continues its hiking cycle as they're very serious about increasing the overnight rate to combat rising inflation and is trying to get ahead of inflation rising any further and doing any more damage to the economy.As a result of the rate mandate, we are seeing house prices fall and return more to a balanced market. I believe we will continue to see a further drop in home prices going into Q2 2023. This would be a great opportunity for those looking to buy an investment property or upgrade to a bigger home.One thing to remember is that if history proves to be correct, once the Bank of Canada stops increasing the prime rate which is expected to be in December 2022, they have RATE CUTS almost 12 months later. All that to say, patience with a variable-rate mortgage will prove to save you money over the long term. Summary of Bank of Canada's Latest Rate Announcement 

  • New Prime Rate: 5.95%

  • My Rate Forecast: 1 more rate hike for 2022 (0.50% increase)

  • Next Rate Meeting: Dec 7, 2022

  • Next Rate Hike Forecast: Increase of 50 bps (0.50%)

  How will this affect you?

  • ~$29/month increase per $100,000 mortgage balance

  • If you have a TD or CIBC variable rate - your payment remains the same but your amortization increases.

  • The interest rate on your HELOC would've also risen by 0.50% to 6.45% (Prime+0.50%)

My Thoughts & ForecastGiven the Bank of Canada's latest comments, I do believe we are near the Peak which is at 4.25-4.50%, After the next increase on Dec 7 2022, we will see rates remain the same for the most part of 2023 until we see the first rate cut in Q4 2023 -Q2 2024.

FIVE Options to Consider

  1. IF you're on a FIXED payment variable rate with TD or CIBC, I would recommend increasing your mortgage payment by $400-$500/month to make up for the past increases to avoid hitting your "Trigger Point."

  2. Stay the course if you currently have a variable rate of less than 5.40% (Prime -0.40%)

  3. Convert to a 1,2 or 3 yr fixed rate with your current lender (Do confirm the rate with me before proceeding with this option)

  4. If you owe a considerable amount to your HELOC, it may be a good time to consider converting that HELOC into a mortgage. The current HELOC rate is 6.45% vs a Mortgage rate of 5.50%.

  5. Cashflow Booster: Convert a portion of your mortgage to a HELOC to pay interest-only payments. Recommended ONLY if current payments are not manageable.

   5-year term fixed rates currently range between 4.89%-5.69% and are trending downwards, hence why I do not recommend it at this time. There will be a time to convert your mortgage to a lower fixed rate possibly next year.What should you do?

  • I recommend staying the course with your variable rate unless your current rate is above 5.50% due to the large spread between variable and fixed. I am personally not locking in any of my variable-rate mortgages at this time.

  • The variable rate still provides the flexibility of a low penalty and is likely still an interest saving vs converting to a fixed rate today as noted above.

  • It is anticipated that the Prime Rate will come back down again in 2023/2024 due to a "soft" recession and the fast-paced increases in the prime rate typically cause this. Most Economists are predicting rate cuts in late 2023 or early 2024.

  • If you would like to lock into a fixed rate, I only recommend a 1-3 yr term here and IF you don't have plans on taking out equity in your current home or selling your home for the next 3 years.

 

If you are CONSIDERING making any sort of changes, reply to this email to book a call where we will compare the cost and interest savings now vs. your current rate to ultimately help you save money. We have a fixed vs. variable rate sensitivity calculator that will show you the cost/benefit of staying variable or converting to fixed over the next few years. It should only take a few minutes to run these numbers for you!

As always, if you know of anyone else that could use this same type of ongoing advice and support, your recommendation will mean a lot as I would love to help them as well. If you have any questions or looking for guidance, feel free to reply to this email or reach out to me directly. Best regards,

Varshan ThavarajahMortgage Broker & Partner | MBL # M1600275Banyan Mortgage Group | FSRA #10680647-404-8812[email protected]Top 1% of Mortgage Brokers in Canada