Bank of Canada hikes rate. What does it mean for your mortgage?
The Bank of Canada has increased its benchmark interest rate for the second time this year, a sign that the economy is improving enough to allow borrowing costs to rise from historic lows reached in the aftermath of the global financial crisis.
The overnight lending rate was raised to 1 per cent from 0.75 per cent. When the Bank of Canada changes its benchmark rate, the move ripples through to other interest rates, including those of mortgages. With that in mind, here is a guide to how the rate hike will affect homeowners and prospective buyers.
Homeowners with fixed-rate mortgages
There is no immediate impact on payments for existing mortgages. Only when the mortgage comes up for renewal would higher rates affect payments.
The interest rate on fixed-rate mortgages is influenced by the interest rates on bonds issued by the federal government, not the Bank of Canada’s overnight rate.
But if the central bank is confident enough about the economy to start pushing the overnight rate higher, expect interest rates in the bond market to rise as well.
Homeowners with variable-rate mortgages
The interest cost on variable-rate mortgages is pegged to your lender’s prime rate, minus whatever discount you negotiated. The prime rate is in turn guided by the Bank of Canada’s benchmark overnight rate. Payments on most variable-rate mortgages will be adjusted higher in a matter of days or weeks to reflect an increase in the overnight and prime rates.
It could become tougher to qualify for home ownership. Federal rules unveiled last fall require home buyers with a down payment of less than 20 per cent to “stress test” their ability to carry mortgage payments at whichever is greater: the negotiated rate in their mortgage contract or the Bank of Canada’s conventional five-year fixed posted rate.
The central bank’s rate is based on posted five-year fixed mortgage rates at Canada’s largest banks, and was most recently set at 4.84 per cent, well above many discount rates on the market.
From Darlene Hanley, Oriana Financial.