January 18, 2018
How Will Higher Bank of Canada Rates Impact Your Mortgage?
As expected, the Bank of Canada hiked its target for the overnight rate Wednesday morning, giving current and potential homebuyers cause to consider their future mortgage options.
“As expected the Bank of Canada has increased the prime rate by a quarter point. This was driven by strong economic performance in 2017 and rising inflation,” James Laird, president of CanWise Financial, says. “Their language suggests a further rate hike in March is unlikely but will be considered as 2018 unfolds.”
The Bank of Canada announced its third target rate increase within the past six months, hiking it an additional quarter per cent to 1.25 per cent – the highest it’s been in nearly a decade.
It cited strong economic data and inflation that is trending close to target. However, the Bank also mentioned uncertainty around the future of the North American Free Trade Agreement as one factor currently impacting an otherwise positive economic outlook.
Still, the data were enough to warrant the rate hike.
What the Rate Change Means for Homeowners
Homeowners currently in a fixed rate mortgage remain unaffected by the rate increase until their mortgages come up for renewal. However, the increase is expected to impact variable rate mortgages almost immediately, since the Bank of Canada’s overnight rate is used by lenders to set their variable rate loans.
“Those with variable rate mortgages, home equity lines of credit, and personal lines of credit can expect their interest rate to rise by a quarter point next month,” Laird says. “It’s this group that feels the immediate impact.”
If you’re a current homeowner who is up for a renewal in the near future, you could touch base with your lender or mortgage broker to determine the best plan for your mortgage future.
What About Future Buyers?
Those considering buying a home in the near future should consider getting a pre-approval in case of future rate increases, Laird advises.
“This rate hike was highly anticipated and so has been priced into fixed rate mortgages already,” he says. “But for anyone considering purchasing in the spring market, getting a pre-approval to hedge against any further interest rate increases is an excellent idea.”
A mortgage pre-approval can provide a rate guarantee of up to 120 days, which would protect against future rate increases.
Future Rate Hikes
While additional rate hikes are predicted to come in 2018, the Bank of Canada is remaining cautious about future adjustments.
“While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target,” the Bank of Canada said in a statement. “Governing Council will remain cautious in considering future policy adjustments, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.”
The Bank of Canada is scheduled to make its next rate announcement on March 7, 2018. It will release its full update on the outlook for the economy on April 18,2018.