Another BoC rate increase... Now what?
January 25, 2023 | Posted by: Harold Hagen
The Bank of Canada increased their overnight rate this week by another 0.25%, bringing our prime lending rate to 6.70% with most Lenders. The Bank also stated that it expects to hold off on further rate hikes, making it the first major central bankto say it would pause monetary policy tightening. With that said, the Central Bank also reiterated that it expects the economy to “stall” in the first half of 2023, but does not foresee a significant recession.
What does this mean for you?
If you have a fixed rate mortgage, nothing changes for you. If you are in a variable or adjustable-rate mortgage then your interest rate will increase by 0.25% and your next payment will likely be higher as well. How much higher? For every $100,000 borrowed, your payment will increase by about $13 per month.
Cash Flow Concerns?
The sooner you address issues with cash flow, the better. By extending your mortgage amortization, you may be able to alleviate some of the pain or lower your mortgage payments. Reducing your monthly payments will free up some cash and when it's possible, you can get back on top of your goals by making extra payments directly to your principal.
Mortgage Renewing in 2023?
If your mortgage is coming up for renewal in the next year, now is the time to review your situation. Getting a clear picture of your options now means we have time to deal with potential issues and take advantage of the best opportunities.
Home sales and housing market activity has slowed and home prices continue to fall in many areas. Purchasing a home at a lower price now with a 1 or 2-year mortgage term will allow you to refinance when rates come down.
Should I lock-in my variable rate now?
My personal recommendation for locking-in has not changed. Fundamentally, nothing in the market has changed. Historically speaking, choosing a Variable rate or 1-year Fixed rate mortgage has always saved homeowners more money 4 out of 5 times when compared to choosing a longer-term fixed rate mortgage.
This is always a personal preference and something we should discuss if you have concerns.
Although rates are expected to remain elevated for some time, the expectation is that they will start to soften sometime after 2023. What is most important right now is not necessarily locking-in to an inflated fixed rate, but instead to put yourselves in a strong position to be able to weather this storm of high costs.
What are we recommending?
1) If you have any high interest debt right now, you need to pay that off and get you locked-in to a low and affordable monthly payment.
2) If you are in a 'fluctuating payment - variable product' with a low remaining amortization, we need to get you locked into a 'fixed payment – variable interest rate' and increase your amortization temporarily to make your monthly budget more comfortable.
3) If you are comfortable with your payments, and budget is not a concern right now, then we should talk about accessing some equity from your home so that you can invest during this period of time. Investing in the stock market and/or in the real estate market is how smart investors earn their wealth. There may be opportunities right now, and many of our clients are sitting on a large amount of equity in their homes to make this happen.
4) And as always, if you are comfortable with the variable rate and fluctuating payment, then my suggestion is to stay put. No need for any further increases, as your payment is already comparable to the fixed rates today.
I want to lock-in to a fixed rate, what do I do now?
Contact your lender directly and ask them what rate they will offer you to lock- in. Once you have that information if you would like our help, send it to me and I will help you with a strategy.
While it may be hard to see right now, in the larger picture of home ownership, today's market and financial situation are temporary. The key to getting through it is going to be smart mortgage and financial planning. If you'd like to discuss your situation, book a call with me.