It could have gone either way but Mark Carney and co. felt Canada’s economy was hot enough to warrant another tightening.
The Bank of Canada has therefore raised its overnight rate target to 1%, from just 0.25% three months ago.
Here’s the gist of the Bank’s written statement today:
As a result of today’s increase, prime rate will likely climb to 3.00% this week. It would be the first time prime has seen 3% since February 2009.
If you’ve got a variable payment mortgage, this hike will add about $13 to your monthly payment, for every $100,000 you owe.*
The next BoC interest rate meeting is October 19.
* Assumes a 25-year amortization, semi-annual compounding, and a prime rate increase of 25 basis points.
This is my very first post on this site although I have been diligently following the articles for some time and have tried to learn as much as I can to make informed decisions. We have tried to do the right things along the way. With this latest hike and the ambiguity of the BoC’s statements we are not sure what to do.
We saved to put down 25% on our home. Our family has two solid incomes that have allowed us to make larger mortgage payments which we’ve been doing. We have about 60% equity in our home. We are currently in the middle of an open 5 year variable rate of Prime -.30. Accordingly, over the last 2 years we’ve managed to take over 3.5 years off our amortization period and have about 8 years left. Our risk tolerance for higher payments is reasonably high. I’ve read about the past history of variable rates beating out fixed rates over the long term and yet I’m puzzled because it seems that 2/3’s of mortgages are at fixed rates. We’ve been to the Bank to talk to the mortgage consultants on a couple of occasions and their advice has always been to stay the course. I just don’t want to be greedy and pay the price by staying variable if rates are indeed going to be moving higher.
Denis – the thing you always have to remember is what you have done by staying variable UNTIL rates come up.
IF you think you are being “greedy” – and I would seriously challenge you to change that perception – then determine what your payments would be at a fixed rate now, set your current payments to that payment, and
1. you have a built in mortgage payment buffer preparing yourself for any future rate hikes; and
2. are hammering down on your principal balance significantly.
You are doing the right thing. Unfortunately, too many people listen to uber-conservatives who think the R*** word (risk) is 10 times worse than the F*** word.
would need some advice (knowledge) here. I am currently on a HELOC with prime +1 (fully open, interest only minimum payments) with BMO.
Should I go and contact them to get a better rate ? What would be realistic now Prime +x ?
Any other Banks that offer a better HELOC at this time ?
Thanks for comments
There’s a bit more than that to consider. For one thing, if you set higher payments you can reduce the principal faster while interest rates are low which means you get a bit less of an increase when they rise. This means more for someone who’s starting out with little equity and paying a lot of interest so it probably wouldn’t make all the difference for you but it does help.
Another important factor is the difference between a variable rate and a fixed rate. Last year fixed rates were looking better than usual because it wouldn’t take much of an interest rate increase for the variable rates to catch up, but most of the time with differences of 2% or more it would take some time to rise to the level of the fixed rate, and even then you would have saved along the way. The term analyses posted every few months on this site are a great breakdown of how close things are how useful different fixed terms are.
When it comes down to it, in a straight comparison variables do have a margin of safety when rates are rising (depending on how fast and how far they rise) but they also give you more options if you don’t go out and spend the difference. For a real answer you’ll need a spreadsheet or advice from someone experienced – I wouldn’t count on a bank employee to spend a lot of time on this.
Steph…you should contact a mortgage broker, not BMO. I recommend Robert McLister? Banks only sell their products and unless you have loyalty issues – you can get a Prime -.70 with other lenders (not BMO).
I still think I am better off with my variable rate – historically this is the case.
With these last few increases, I am not sure what is going to happen.
The next meeting is Oct but I heard rumours of no more increases the next year.
where can you get a Prime -.70 for HELOC (not VRM)?
Richard, unfortunately both (Bank) consultants we went to were not interested in delving into spreadsheets/ formulas to show us the differences which is probably why I am still (in part) a little uneasy with my decision. For those of us whose strengths lie elsewhere seeing the options in black and white could certainly be of assistance. One thing I’ve taken from this experience is that I’d best spend a little more time on assessing my rapport with the Bank Consultants in addition to looking for the best rate/package.
Rates are going up. Maybe not every meeting. But do not believe that they are staying put for the next year… that is crazy talk.
Why get a HELOC? How long do you plan to borrow the money for?
There are banks that are offering HELOC at Prime + 0.5%, such as RBC and TD. it may take a bit of negotiation. But even better solution would be if you get a variable mortgage. If you do the calculation, your payment in this case will stay almost the same (with 35 year amortization), but you will be paying a lot towards the principle. In HELOC you were not paying any principle down. Moreover you ca get a mtg that does not increase the payment until the trigger point, so you are covered from interest rate hike as well in tens of cash flow. I am comparing HELOC and 35 year mtg. You can choose to pay down the principle faster in a mtg just like you would have done in the HELOC.
Way I see it, ‘interest’ is the cost of money and if we can’t create inflation using economic growth then let’s use interest rates to reach this goal. Am I wrong?
Is Prime -.70 is something I can expect with an open, or closed variable?
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