Variable Rate on the rise yet again by another 0.50%
Bank of Canada has raised their overnight rate by 0.50%, bringing it to 4.25%. Which for most lenders will likely increase their Prime rate to 6.45% from the previous 5.95%.
This change will have an impact on those with a Variable Rate Mortgage or Home Equity Line of Credit. It will mean a $29 a month payment increase for every $100,000.
Those with a fixed rate mortgage won't be affected by raising rates until they come up for renewal.
What is the Bank of Canada Overnight Rate?
The overnight rate is generally the interest rate that large banks use to borrow and lend from one another in the overnight market.
The Bank of Canada holds this Key Lending rate. They might lower it to encourage borrowing and spending OR they may increase it to curb inflation and debt levels.
Major lenders typically raise their prime rate when there is a hike. Thats the number they use to set interest rates for loans and mortgages.
Unlike a fixed rate where one is locked in to their rate, those in a variable rate will be affected by these changes. Home owners with fixed rate mortgages won't be affected until they have to renew.
Should I lock into a Fixed Rate now?
Historically variable rates have shown to save you more money in the long run.
A few things you should consider before locking into a Fixed rate is:
Are you planning to sell your home within the next 3yrs? Then we would highly recommend you stay in your variable rate mortgage.
Can your budget handle a payment increase if rates go up?
Will you be putting extra money down on your mortgage each month? If so, the savings from a variable rate can help you pay down your mortgage faster.
If you are considering locking in, give us a call to discuss first. We have a fun little calculator to help you forecast your savings if you decide to stay with your variable rate.
Source: First National - one of Canada's largest non-bank mortgage lenders, offering both commercial mortgages and residential mortgage solutions.
Today, the Bank of Canada increased its overnight benchmark interest rate 50 basis point to 4.25% from 3.75% in October. This is the seventh time this year that the Bank has tightened money supply to address inflation and means the policy rate is now as high as it has been in 15 years. It also indicated quantitative tightening will continue as it serves as a “complement” to increases in the benchmark rate.
We summarize the Bank’s observations below, including its forward-looking comments on the need/likelihood of future rate increases below:
Canadian inflation
CPI inflation remained at 6.9% in October, with many of the goods and services Canadians regularly buy showing large price increases
Measures of core inflation “remain around 5%”
Three-month rates of change in core inflation have come down, “an early indicator that price pressures may be losing momentum”
Canadian Economic and housing market performance
GDP growth in the third quarter was stronger than expected, and the economy continued to operate “in excess demand”
The labour market remains “tight” with unemployment near historic lows
While commodity exports have been strong, there is growing evidence that tighter monetary policy is restraining domestic demand: consumption moderated in the third quarter
Housing market activity continues to decline
Data since the October Monetary Policy Report supports the Bank’s outlook that growth will essentially stall” through the end of this year and the first half of 2023
Global inflation and economic performance
Inflation around the world remains high and broadly based
Global economic growth is slowing, although it is proving more resilient than was expected at the time of the Bank’s October Monetary Policy Report
In the United States, the economy is weakening but consumption continues to be solid and the labour market remains “overheated”
The gradual easing of global supply bottlenecks continues, although further progress could be disrupted by geopolitical events
Outlook
Although the Bank’s commentary noted that price pressures that are driving high inflation may be losing momentum, it went on to say that inflation is “still too high” and that short-term “inflation expectations remain elevated.” In the Bank’s view, the longer that Canadian consumers and businesses expect inflation to be above the Bank’s 2% target, “the greater the risk that elevated inflation becomes entrenched.”
Given these economic signals, the Bank’s Governing Council stated that it “will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target.”
Of note, the Bank said it continues to assess how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding. It believes quantitative tightening is complementing increases in the policy rate.
It concluded its statement with a familiar refrain: “We are resolute in our commitment to achieving the 2% inflation target and restoring price stability for Canadians.”
Analysts and commentators will seek to interpret those outlook comments for signs that the Bank has reached or believes it is close to reaching the terminal point in its current rate-hike cycle. For now, that remains a question of debate and speculation that will turn on future economic signals.
Next touchpoint
For the Bank of Canada, 2023 starts on January 25th with its first scheduled policy interest rate announcement. First National will follow the Bank’s report and provide an executive summary on our website the same day. For other capital market insights, please visit the Resources page of our website on a regular basis.