Bank of Canada Has Finally Risen Their Rate
What does this mean for your 2022 home buying plans?
We’ve finally seen the first of a set of rate increases planned by Bank of Canada for this year. Yes, mortgage rates are going up. So what does that mean for your home buying plans this year. Take a Minute to Watch this video, or scroll to the bottom to read our take on the current situation.
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So the Bank of Canada has finally done it! Two years ago this week the bank first dropped rates as a result of the pending COVID-19 pandemic, and now has for the first time, increased rates. As was widely expected the Bank of Canada raised rates a quarter percent today, March 2, 2022.
The Bank of Canada made its first of several expected rate increases today bringing the overnight rate from the bottom floor of 0.25% to 0.5%. While this could be called “doubling” the rate, what it really means is that the retail prime rate has now increased from 2.45% to 2.70%. A move that we knew would happen eventually. Looking forward we can expect a few more increases as the year progresses. It is my opinion that we will see 5 to 7 more .25% rate increases between now and mid 2023.
For mortgages, this means rates for variable rate holders will also increase by a quarter percent. Most variable rates out there are about 1% below prime, and several newer mortgages are even lower than that. If your variable rate was 1.25% yesterday, then today it is now 1.5%. On a $350,000 mortgage over 25 years, that means your payment increased by $41 a month. From $1358 to $1399. Still significantly lower than the currently available 5-year fixed rates which are mostly around 3.0%.
If you are in a variable rate mortgage, now is not the time to be concerned. If you are looking to get a mortgage right now and are comparing the option of a 5-year fixed to a 5-year variable rate, this increase does not mean you *should* lock-in and choose a fixed rate. The spread between the rates is still 1.5%. That same $350,000 mortgage at a 2.99% fixed interest rate the same mortgage payment would be $256 a month higher than the variable rate after today’s increase. Only after 6 more increases would your variable rate match the current fixed rates and you can save a lot of money until then!
Could choosing variable mean you pay more than had you chosen fixed over the five years? Yes. But the opposite is also true! This is an individual decision based on your risk tolerance and what will allow you to sleep better at night.
Let me talk briefly about the two big uncertainties and how I think they will shape the mortgage market going forward, specifically how they will impact future rate increases
There is certainly a lot of uncertainty in the world today. With the unprovoked invasion of Ukraine by Russia, and the corresponding increase in oil and other commodities we may be in for a ride. How much of this can be controlled using interest rate policy is unclear. The situation is very fluid but the bank insists it is following the situation closely.
Covid Economic recovery:
Economic growth in Canada at the end of 2021 was stronger than the bank’s projections. However in January the Omicron variant of COVID19 triggered a setback in the labour market with temporary layoffs and elevated employee absenteeism. But that is now largely behind us and First Quarter growth is back to looking solid.
As the economy recovers and continues to expand, the Bank of Canada expects that interest rates will need to rise further. This falls in line with most projections. I will continue to keep you updated on changes as the year progresses. In the meantime, if you are looking to see how this can impact you, please let us know!
Meet The Author
Josh Tagg started his career as a mortgage in 2006. During his award-winning career, he has helped thousands individuals and families secure mortgages for their homes.
Owner, Mortgages For Less