The Bank of Canada had their rate update today (June 1st) and announced another much anticipated rate increase to the overnight rate. It was risen by 0.50% to 1.5%. This is still lower than pre-pandemic levels. The Bank of Canada overnight rate was 1.75% pre-pandemic.
For the full update from the Bank of Canada: https://www.bankofcanada.ca/2022/06/fad-press-release-2022-06-01/
Below we clarify what this means to the average Canadian mortgage holder.
Key points from the update:
- Bank of Canada increased their rate by .50% to a new rate of 1.5%
- Inflation and supply chain issues across the global are seeing costs of goods increase dramatically. The BOC is trying to tackle this inflation by raising borrowing costs.
- The main driver of today’s increase is the government’s attempt to fight inflation.
- Likely there will be continued increases this year if inflation stays high.
How this affects everyday Canadians:
- Interest rates on variable debt (variable rate mortgages and lines of credit) will increase by .5%
- For every $100,000.00 of mortgage debt payments will increase by roughly $24.00 a month (based on a 25 year amortization)
In our previous rate up date we talked about options for locking into a mortgage.
In this post we want to reach out to people that have had a mortgage for a while and have it coming up for renewal in the next year OR those that are in a variable that have had their mortgage for a few years or more that are struggling with the payments or finding that their living costs.
If you are in a variable mortgage: The costs to break your mortgage are very low (3 months interest). One strategy can be to refinance your mortgage and extend the amortization period back out to 30 years. We just did this for a client that had been in their home for four years and had only 21 years of amortization left on their mortgage amortization period. Extending the amortization out to 30 years greatly reduced their payments to help them cope with rising costs for their family.
If you are in a fixed mortgage with your renewal coming up later this year or next, here are a couple of strategies we have found helpful for clients:
- If you want to stay in a fixed mortgage with rates at their highest in many years you may want to consider a shorter term fixed mortgage (such as a 2 or 3 year term). The penalties for breaking a shorter term mortgage are generally less than a 5 year fixed. This will allow you to potentially take advantage of lower interest rates should rates drop back down in the next year or two
- Another option is to re-amortize your mortgage at renewal. By extending your amortization back out by 5 years it will greatly reduce your monthly payments. This can help with budgeting if your cash flow has become tight with rising living costs.
Have mortgage questions? Please reach out to us at anytime!