Bank of Canada raised the overnight lending rate again today by 0.5%. Keep in mind, we are still lower than the pre-pandemic rate...
Bank of Canada met this morning, and as anticipated, they raised the key interest rate by another 0.5%, making the overnight rate 1.5%. The Bank of Canada sets the overnight lending rate which directly corresponds to the prime interest rate set by major banks, and this rate affects financial products like variable/adjustable-rate mortgages, lines of credit etc.
The banks/lenders have since adjusted their prime lending rate for mortgages to 3.7%, with TD bank adjusting to 3.85% (they have been .15% higher since 2015).
Russia’s invasion of Ukraine, COVID-19 lockdowns in China and backlogged supply chains are all fueling higher prices for energy and food. The Bank of Canada states these global pressures along with low unemployment rates are key factors in the current high rate of inflation. The decision to raise the rates by the Bank of Canada was widely expected as it moves to aggressively rein in high inflation
Please keep the following in mind when considering locking in:
In February of 2020, prime rate was at 3.95% and was on the upward trajectory. We are still 0.25% below pre-COVID prime rate.
Bank of Canada meets again on July 13, and we might see another rate increase before inflation begins to stabilize.
A 1% increase (which is what we have seen over the last few months) to the overnight rate has about a 10x greater impact on the economy than it did in the early 1980’s.
Fixed rates are directly correlated to Canadian bond yields, so this increase will not impact fixed rates. Although, we are continuing to see Canadian bond yields rising and a 5-year fixed rate mortgage is currently in the 4.29-4.84% range (depending on the mortgage product). We anticipate fixed rates may continue to rise slightly more.
We are predicting another 0.5% increase to prime in 2022 with about another 0.5-0.75% in 2023 before leveling off.
Economists have alluded to a possible recession to hit late 2023/early 2024, which in turn will bring the rates back down.
If you are in a variable rate mortgage and think that locking in may be in your best interest, please reach out and we can advise on what we can offer when it comes to fixed rates. Keep in mind that if you DO lock in, and rates do come back down, the pre-payment penalty on your mortgage will increase if you have to break the term early. Penalties on fixed rates are heavily based on the spread between your rate, and current rates at the time of breaking the term. The lower the rates are, the higher your penalty will be.
On a personal side of things, us brokers at McIntosh Mortgages who are currently in a variable rate, will be choosing to carry on, and ride the wave of prime rate.
