The Bank of Canada has been signalling for a while now that they will respond to inflation by raising interest rates. Sure enough, on March 2nd they announced a hike in the overnight rate by 0.25%. Here are answers to the most commonly asked questions.
How does this affect my current mortgage?
It depends if your mortgage is fixed or variable. A rate hike will impact variable-rate mortgage holders immediately as more of your monthly payment will now be going to pay interest and less toward your principal. Fixed-rate mortgage holders will not be affected until it’s time to renew or refinance.
Should I refinance now?
According to many economists, the March 2nd rate increase was the first of several expected this year. Despite that, rates are still at near-historic lows so if you’ve been thinking about refinancing to secure a better rate or to consolidate debt, it’s a good idea to get the ball rolling before the next rate hike. An analysis of your situation will determine if it makes sense for you to stay in your current mortgage until it’s time to renew or if it’s advantageous for you to pay the penalty and break out of the mortgage, but the potential savings diminish slightly with each rate increase.
Should I convert my variable-rate mortgage to a fixed rate?
It’s natural to be tempted to lock in as soon as you see rates starting to climb but just keep in mind that it’ll take a few more rate hikes to narrow the gap between variable-rate mortgages and their fixed rate counterparts. If nothing else about your situation has changed then the reasons you chose variable over fixed still apply and you’ll still be paying less for the next several months at least.
If you can afford to, a great tactic to consider is to increase your mortgage payment to the equivalent of what you’d pay in a fixed rate. The extra payment goes directly to principal which lowers your cost of borrowing (the amount of interest you pay over the life of the mortgage) and protects you from “payment shock” when it comes time to renew your mortgage.
If you’re still feeling uneasy, let’s have a conversation about your conversion options.
I am thinking about a purchase in the coming months. Should I get a mortgage pre-approval?
Yes! A pre-approval is a smart move anytime you’re considering a purchase but especially in a rising rate environment. A preapproval will lock in your rate for up to 120 days so you’re protected from any rate increases while you shop around.
You are unique and so are your home financing needs. Call me so we can determine what is the best plan for you, whether you have a fixed mortgage, a variable rate mortgage or you are simply looking for advice. I am happy to put my expertise to work for you.
IN CASE YOU MISSED IT…
If you’re applying for a mortgage in Canada, you must pass a mortgage “stress test” regardless of whether your mortgage is insured or uninsured. The test gauges your likelihood of default in the event of an interest rate hike. Stress test rates for uninsured mortgages are set by the Office of the Superintendent of Financial Institutions (OSFI), while rates for insured mortgages are set by the Minister of Finance.
In December, OSFI announced that the stress test rate for uninsured mortgages will continue to be the higher of 5.25%, or the contract rate plus 2%. Rates for insured mortgages are currently identical.