Bank of Canada Increases Rates Again By One Whole Percent

The Bank of Canada has increased rates again, but this time by 1%. This is the third straight rate increase since March of this year. The Bank of Canada is expecting more rate increases in the future, and experts are estimating the rate increase will be around another half percent or 50 bps (basis point).

I know this is a major shock to many people and many are feeling unsure about the future of our rates. Since I started my career, I have always been hearing about the 1980s.  People would say, “I remember when interest shot up to 18%.” In response to them, I would always say, “the chances of that happening again are not likely. Something terrible will have to happen for that to be the case.” Well, now look where we are.Now, I don’t think interest rates will reach that point. The government is being proactive with their rate increases and, honestly, I agree with what they’re doing. Interest rates should never have been at 1.25%. That is a ridiculously low interest rate to be paying on your home. Mortgage rates, in my opinion, should be around 4 to 5% in order for us to have a healthy and balanced market. Major highs and lows within a 12 month period doesn’t make people feel safe when buying, and it’s difficult for people to make educated decisions.  Can you imagine buying a home six months ago and having it drop in price by $300,000? I feel terrible for all recent buyers who are currently in that situation. So, these rate increases are good for us long-term and we must remember they’re not permanent and most likely will be short-term. Below you will find my opinions, projections, and what I think you should do right now.   

There are two types of variable rate mortgages: variable rate mortgages and adjustable rate mortgages. Variable rate mortgages are the most common type of variable mortgage. This basically means your mortgage payment stays static or the same over the course of your mortgage. This is great for us in a decreasing rate environment, as less of your payment goes toward the interest and more toward the principal balance of your mortgage. Now, in a rising rate environment like we have been in, this flips and most of your payment goes toward interest. There can actually be a point in time, if interest rates rise enough, that none of your payment is going toward the principal balance of the mortgage. Obviously, we don't want that to happen and we need to be proactive with our strategy moving forward.  As your mortgage broker, I will work these numbers out for you and we can then create a strategy and payment structure that best fits your lifestyle. For those reading this who are now thinking about locking into a fixed rate mortgage, please keep reading.

We’re heading into a recession and we need to budget and plan accordingly. My thoughts are: we will have another rate increase to the variable rates in September by half a percent or 50bps. Today’s current fixed rates are around 5.33%. Over the previous four weeks, we have been seeing 5-year bond yields dropping (see below chart).  At the peak, which was June 14th, bond yields were sitting at 3.6%. This is important to note because this determines what fixed mortgage rates will be. Typically, a lender will want to earn 1.5% above the bond yield, hence our current fixed interest rates.  If you take a look at the graph today, you will see bond yields sitting at 3.2%. If we add the same 1.5% profits the lenders wish to make, 5-year fixed mortgages should be around 4.7%. So, if bonds sit still at this current rate or drop a bit further, we could see fixed mortgage rates drop a bit further, too.

Let’s take a look at the prime lending rates over time: 

Over the last 12 years, you can see our prime lending rates increasing and decreasing over time.  I want to focus on where our prime lending rates were sitting in 2018 to March of 2020. This was our variable interest prior to the pandemic. This is the target interest rate that the government wants us to be at. You can see it sitting at 3.95%.  

The government is curbing inflation with these increased interest rates, and once the economy slows down enough, I suspect they will start decreasing interest rates again to stimulate the economy and create a more balanced market.

So these rate increases are great for us long-term. But it's time to increase our payments, for the short-term. Remember, this is not normal for us — this is unique and it won't last forever. 

If you are in a variable rate mortgage, I suggest we book a call soon to talk about your options. Chances are, we will need to increase your payments. We need to review your mortgage and create a short-term strategy to get you through the next 12 to 18 months. If you are not in a variable rate mortgage, I still suggest booking a call so we can talk about what this new interest rate means for you.

You can book a call here. Feeling uncertain during these times is normal, and I’m here to help you navigate your way through this.