Attention Variable Rate Mortgage Holders

To no one’s surprise but many variable rate mortgage holders dismay, The Bank Of Canada increased its overnight lending rate again by a ¼ percentage point, the third increase following hikes in both July and September.

The New Rate Hike

It is a bit discouraging to see common sense and fairness failed to present itself as the banks all quickly follow in unison increasing their prime rates (which your mortgage rate is based on) with each increase by a full .25%. After all, it is hard to forget that the last two Federal decreases in 2015 of 0.25% each, the public only received decreases of only 0.15% – each time as the Banks all reduced their prime rate by only .15%.

Every single lender moved down in unison, not one dropped the full 0.25%, yet amazingly, not a single lender saw fit to increase rates by the exact same 0.15% on the way back up. Every lender has instead increased by 0.25% – a full 100% of the increase passed on to you, the borrower.

Disappointing to say the least. We share all the pain of increases, yet only part of the pleasure of decreases.

This is disappointing, not surprising, but certainly disappointing.

Putting a Rate Hike into Perspective

Although no one likes paying more you can expect your mortgage payments to increase with this latest increase in Prime rates. A payment increase of ~$13.10 per $100,000.00 of the mortgage balance.

For example, a mortgage balance of $300,000.00 will see a payment increase of $39.30 per month.

Nothing to panic about and looking at the reasons why you are in a variable rate mortgage, to begin with, may help ease your mind.

• Variable Rate mortgage has long been qualified at a much higher rate, so you should be able to afford the risk of any fluctuations
• Variable Rate mortgages are flexible, only a 3-month interest penalty to break mid-term compared to a potential IRD penalty of a fixed rate term that could result upwards of 4.5% of the balance.
• Most are still enjoying deep discounts off of prime rate and thus outperforming fixed rates over the term of the mortgage – especially if you have taken advantage of any prepayment privileges and accelerated payments.

Other Options to Consider

• Lock Into Shorter Term

Not necessarily a bad idea, although this depends on two things:

1. Which lender you are with as policies vary.
2. How many years into the mortgage term you are.

If your net rate is now 2.95%, and have the option of a 2-year or 3-year fixed ~3.00% – this may be a better move than full 5-year commitment. But don’t forget the penalty differences, if you are definitely not moving or selling during that term, this could be a good strategy.

• Transfer to a new lender

Depending on your current loan to value you may be able to transfer into a better discount new variable term without fees. You will have to pay the 3-month penalty to break your current mortgage (or cap it into the new mortgage amount if available), but the savings could be worth it depending on your new rate.

• Refinance

Maybe it is time to do a financial review and consider refinancing to consolidate any other monthly payment obligations and higher interest debts into your mortgage and create a new more affordable budget. This option would be available to someone who has the available equity as you are limited to only 80% mortgage amount of the appraised value.

If you have concerns or are interested in looking at options regarding your variable rate mortgage, please feel free to reach out.