6 Nov 2018
No need to panic after rate increase
You may have already seen the more technical BANK OF CANADA RATE ANNOUNCEMENT on October 24th, or you may not have. The Coles Notes (the simplest version) are as such:
- Global economy remains strong, the USMCA will reduce trading uncertainty
- Canadian economy is balanced for the foreseeable 2 years
- Household spending will increase, but backed by income growth
- Housing activity across Canada is stabilizing
On October 24th the Bank of Canada did what we all expected, they increased the Overnight lending rate by 0.25% to 1.75%. This equated to a PRIME being increased by 0.25% to 3.95%. All variable rate mortgages and lines of credit utilize PRIME to calculate the current interest rate.
Now the BIG QUESTION, how do we as mortgage consumers respond? First, ask your Dominion Lending Centres mortgage broker how they plan to react in accordance to his own financing.
No need to ask me, I will tell you. Variable, with no hesitation. I will stay the course by not pushing the panic button.
Because if I decide to move, re-finance, consolidate, leverage equity or to simply break the mortgage for any reason my penalty will only be 3 months interest. I also need to consider how much money I have saved over the term by utilizing a variable rate mortgage rather than a fixed. During my current mortgage the spread between variable and fixed is approximately 1%.
Please excuse the following ‘tongue & cheek…’To go with a fixed mortgage tells me that you can predict the future with absolute certainty.
I know I can’t, so I rely on statistics. 65% of all fixed mortgage consumers will break their mortgage in 33 months, the penalty that follows is unavoidable. For the average B.C. mortgage of $350,000 the penalty is approximately $14,000. By opting for a fixed rate mortgage, you have declared to the universe that there is a zero percent chance you will need to access equity, amend the current mortgage or consider applying for a secured line of credit.
Real estate wealth is a long game, building net worth doesn’t happen overnight. Gains are not made in the short term. Just like other markets (stocks, bonds, mutuals, GICs RRSPs), there will be highs and lows.
What does this increase mean?
Dollarize it for your own personal consumption. For an increase of 0.25% the payment will go up $13 per every $100,000 borrowed. For some variable rate borrowers, the payment hasn’t even changed as the lender only adjusts the principal and interest allocation.
Now the question becomes, what do you do? Remain with variable or lock into a fixed. I recommend staying the course.