Interest rate hikes may not cost you as much as you think
By Wayne Karl
When the Bank of Canada announced an interest rate hike on Oct. 24 – and within hours all of Canada’s major banks followed suit in hiking their prime lending rates – consumers largely groaned.
All of CIBC, TD Canada Trust, Scotiabank, RBC Royal Bank and BMO Bank of Montreal almost immediately issued virtually the same statement, word for word: “(Insert bank name here) announced that it has increased its prime lending rate by 25 basis points from 3.70 per cent to 3.95 per cent, effective Oct. 25, 2018.”
Yes, the numbers, too, are identical.
BoC had already raised its influential overnight rate target three times since July 2017, to 1.5 per cent from 0.75 per cent, and now this most recent hike to 1.75 per cent, while hinting that further increases are likely.
For mortgage holders, though, the increases may not cost you as much as you fear.
The majority of Canadian mortgage holders are on fixed-rate products, which is why a more moderate pace of rate increases likely won’t impact the market significantly, according to Canada Mortgage and Housing Corp. (CMHC).
Nearly half of existing mortgages in Canada will come up for renewal in 2018, according to a data release from CIBC Capital Markets. However, despite having to renew their mortgage in a rising interest rate environment, a borrower with a five-year mortgage rate may be able to get a better deal on their mortgage renewal today than when they entered the housing market five years ago.
According to calculations from mortgage rate comparison website Ratehub.ca:
The best five-year fixed rate in September 2013 was 3.29 per cent. With that rate, a borrower with a $400,000 mortgage amortized over 25 years would have had a monthly mortgage payment of $1,953 over the last five years.
If that same borrower renewed their mortgage at today’s best five-year fixed rate of 3.19 per cent, their monthly mortgage payment would decrease by $17 per month to $1,936.
“Canadians who require a new mortgage in coming months should lock in a fixed rate as soon as possible,” says James Laird, co-founder of Ratehub Inc. and president of CanWise Financial. “This includes those who are purchasing a home, and homeowners whose mortgage is coming up for renewal.
“Remember that, on average, mortgage providers will offer their existing customers a discount of 0.25 per cent off their posted rate on a renewal. However, there may be more competitive rates out there. Be sure to shop around online or use a mortgage broker to negotiate the best rate for your renewal.”
Laird says borrowers should begin shopping around 120 days in advance of their renewal date in order to negotiate a competitive mortgage rate.
A rising interest rate environment could put downward pressure on home prices, he says, but upward pressure will come from predicted economic growth, lack of housing supply, immigration and first-time homebuyers.
“Borrowers should expect variable rates to perfectly correlate with Bank of Canada rate increases,” Laird says. “Variable rate mortgage holders should also be prepared for several increases to their interest rate in coming months and, with general interest rates in Canada on the rise, fixed rates will rise as well. However, those currently in fixed rates have nothing to worry about until their next mortgage renewal date.”