September 7th BoC Rate Hike
As expected, the Bank of Canada announced another interest rate hike of .75%. This is the fifth consecutive increase for a total bump of 3% year to date. This means lenders will also raise their Prime Lending Rate from 4.70% to 5.45%.
Interest rates for variable rate mortgages and Home Equity Lines of credit will rise by .75%.
For some, this will mean a mortgage payment increase. Roughly, $35-40 per month per $100k borrowed. Others will still experience a rate change but the payment itself will remain the same.
Looking ahead
The Bank expects the Canadian economy to “moderate” in the last half of 2022 as global demand weakens and tighter monetary policy begins to bring demand more in line with supply.
However, given the outlook for inflation, the Bank’s Governing Council continues to note that its policy interest rate will “need to rise further.”
To underscore its current thinking, the Bank wrote that it remains “resolute” in its commitment to price stability and will continue to take action as required to achieve a 2% inflation target.
On the bright side, the Bank offered that as the effects of tighter monetary policy work through the economy, it “will be assessing how much higher interest rates need to go to return inflation to target.”
For more details in the official press release, please click here.
October 26, 2022 is the BoC’s next policy announcement date at which time it will also make its fourth Monetary Policy Report of the year available for review.
Variable Rate (Static Payment) Mortgage Holders: please read
There are two different kinds of 'floating mortgages'. One is called the Variable Rate Mortgage and the other is known as the Adjustable Rate Mortgage. The Variable Rate Mortgage is lesser known. The interest rate is still based on the prime lending rate which means that interest rate will adjust up or down along with the Bank of Canada's interest rate decisions. The unique feature with the VRM (variable rate mortgage) is that the payment is static, meaning that the regular mortgage payment does not change. The amount of which your payment is directed to principal vs interest will change but not the payment itself.
In contrast, the Adjustable Rate Mortgage (ARM) operates similar the Variable Rate except that the payment will change in sync with prime lending rate changes. Those in ARM's are certainly aware of this as they've experienced significant payment increases this year.
TRIGGER RATE: Mandatory Payment Increases Are Coming For Variable Rate Mortgage Holders
Though, we just mentioned that payments do not change, there is a point at which a payment increase can be required. The technical term is called the Trigger Rate. We reach the Trigger Rate when the entire regular mortgage payment is going to interest. The mortgage lender may then contact you and ask that you increase your mortgage payment to ensure that a portion of the payment is directed to the overall balance. Some of you will now be at or above your Trigger Rate.
To find your Trigger Rate, locate the document titled 'Mortgage Loan Agreement'. This would have been provided to you by your lawyer/notary at time of purchase or refinance. If unable to locate, please contact your law office to request a copy. Unfortunately, we don't have access to such information or we would be happy to look it up for you. It may be time to voluntarily increase your mortgage payment by contacting your mortgage holder.
