Canada’s prime rate will be rising to 2.70% as of Thursday, after the Big 5 banks confirmed they will be hiking their respective prime rates by 25 basis points.
RBC and TD Bank kicked off the prime rate increases on Wednesday, followed shortly by CIBC, BMO and Scotiabank. In the case of TD, its mortgage prime rate has risen to 2.85%, the result of an additional 15-bps hike the bank made in 2016 independent of a Bank of Canada rate move.
The announcements followed the Bank of Canada’s quarter-point rate hike on Thursday—the first increase of the Bank’s key lending rate in over three years.
Who will be impacted by a prime rate increase?
The change to the prime rate will affect variable mortgages, as well as lines of credit and home equity lines of credit.
Dan Pultr, Senior Vice President, Strategic Initiatives at TMG The Mortgage Group, told CMT that every 0.25% increase in prime rate translates into approximately $12-$13 of additional monthly interest cost per $100,000 of debt, based on a 25-year amortization.
That means a borrower with today’s average outstanding balance of $320,835—based on TransUnion Canada data—will pay about $40 more in interest each month, or $480 over the year.
Of course, that will increase following subsequent Bank of Canada rate hikes. Most analysts are expecting between three and four additional quarter-point rate hikes this year, while bond markets continue to price in five more hikes in 2022.
What can anxious variable-rate borrowers do?
With a record number of new homebuyers having chosen a variable rate—53% of recent buyers, according to the National Bank of Canada—some may be concerned about the prospects of higher monthly payments.
While converting from a variable rate to a fixed is always an option, it’s not a move that will make financial sense for most borrowers, according to rate analyst Rob McLister. That’s because conversion rates (i.e., the fixed rates offered to variable-rate borrowers wanting to convert) typically stink. It doesn’t help that fixed rates have been trending higher since the second half of last year.
“It’s too late for most people to lock into a long-term fixed rate,” McLister said in an interview with BNN Bloomberg. “I just think that’s too risky based on the math and what could potentially happen to rates.”
Having said that, McLister noted that for the small percentage of borrowers who aren’t able to absorb any kind of rate increase, “for those folks, maybe they lock in.”
“You don’t need to lock in necessarily to a 5-year fixed,” he said. “Depending on your lender, some let you lock into a 3- or 4-year fixed, so you can ride out the initial part of the rate-hike cycle and then hope that things slow down with rates three or four years from now.”
Based on feedback from lenders, at least one in 20 variable-rate borrowers convert to a fixed rate when prime rate starts to rise.