Prime Interest Rate Increased: What is the affect on your Variable Rate Mortgage?

 It had been anticipated that Bank of Canada was going to increase their lending rate and they did by 0.25%.  Banks followed suit and increased their prime lending rate by 0.25%.

There has been quite a stir recently putting many homeowners in a panic that rates were going to spike up quickly and concerns with those who are currently in variable rate mortgages. Banks prime rate increased to 2.95%, just under 3% that it was at September 2010.  It is a small increase of a quarter of percent. Nothing too major.

My inbox and phone has been going steady with homeowners concerned with these changes.  Let’s have a look at the historical rates and the impact a 0.25% increase has on mortgage payments.

Below is a history of Prime Rate over the past 10 years:

Date of Change Mortgage Prime Rate
July 13, 2017 2.95
July 17, 2015 2.70
January 29, 2015 2.85
October 12, 2010 3.00
July 22, 2010 2.75
June 2, 2010 2.50
April 21, 2010 2.25
March 6, 2009 2.50
January 23, 2009 3.00
December 10, 2008 3.50
October 24, 2008 4.25
October 17, 2008 4.50
April 25, 2008 4.75
March 5, 2008 5.25
January 23, 2008 5.75
December 5, 2007 6.00
July 11, 2007 6.25
April 2, 2007 6.00

 

Prime has been pretty consistent with being under 3% since January 2009.  If we look prior to Oct 2008, prime had been steadily decreasing from 2007.  The economy is not as strong as it was prior to 2008.  Rate increases usually happen to keep inflation in check.  Canada’s inflation is still below the Bank’s 2% target and recently it has taken a dip again. Personally, I think the 0.25% is a good thing and it will likely hold for a couple more years until things in the economy pick up.

 

I’m in a Variable Rate Mortgage. Should I lock into a fixed rate now?

Historically, Variable Rate Mortgages (VRM) tend to save more money over the course of a term.  Locking into a fixed term could cost you more money than an increase in your VRM.

Let’s have a look at what the increase of 0.25% has on your mortgage payment:

Example:

Prior to July 12/17, Prime was at 2.70%

VRM was Prime – 0.60% = 2.10%

Principle balance on mortgage:  $300,000

Current Principle & Interest payment: $1284.88

 

New Prime Rate of 2.95%

VRM is now 2.35%

Principle balance on mortgage: $300,000

New Principle & Interest payment:  $1321.59

Change of $36.71 a month with a 0.25% increase of Prime on a $300,000 mortgage.

 

Let’s have a look if you were locked into a Fixed Rate of 2.69%:

Principle balance on mortgage: $300,000

Principle & Interest payment based on 2.69%: $1372.44

That payment is $50.86 higher than the payment with the increase in Prime!

My suggestion: Stick with the VRM and increase your payment by $50.86.  You prepay more against your principle balance & if prime does increase again, you already have the cushion of the extra payment worked into your budget.

 

If you would like to know more about Variable Rate mortgages and your options, give Quantus Mortgage Solutions broker, Jacqueline Jeffries a call at 780.220.5968 or email info@jacquelinemortgages.com.