Mortgage Blog

Bank of Canada Rate Announcement | March 2, 2022

March 3, 2022 | Posted by: Kelleway Mortgage Architects

The Bank of Canada (BOC)has increased the overnight rate (think wholesale rate) and thus the Prime Rate (think retail rate) has increased. 

The BOC Prime will be increasing by 0.25% from 2.45% to 2.70%. 

Fixed-Rate Mortgages (DO NOT WORRY)

Those with fixed-rate mortgages need not worry as their payments will not change. However, any secured or unsecured lines of credit (and some credit cards that derive their interest rate from the lenders' prime rate) will see a slight increase in the interest they are paying on any carried debt. 

The 0.25% increase in Prime will amount to $2.50 per $1000 of debt carried for an entire year. 

Variable-Rate and Adjustable-Rate Mortgages (DO NOT WORRY)

Please do not panic and lock into a fixed rate.  Consider the “what if’s”.

If your discount off from prime (today at 2.70%) is 1.0% then your mortgage rate will be 1.70% today. If the prime rate increases over the next 4 years with 7 more 0.25% increases (thus taking the prime to  4.45%) Variable or Adjustable rate mortgage will be at 3.45%.  Yes, that is higher than most of the 5 yr fixed rate mortgages today.  However, with that gradual increase over the next 40 to 48 months, borrowers will still realize savings, or breakeven, on their total interest paid.

Adjustable-Rate Mortgages

Adjustable-Rate Mortgage Holders typically have a Payment that will adjust at the end of the month to match the new interest rate.  You should expect to see about a $13 increase per $100,000 of mortgage debt (assuming the amortization is approximately 25 years).

Variable-Rate Mortgages

Variable Rate Mortgage Holders typically have a Static Payment.  This payment is like a Fixed-rate because the payment does not NORMALLY change even when the rate inside the mortgage changes.  

Variable-rate mortgage holders have three options to deal with increases in prime: 

Option 1

Do nothing and wait for a reset of the mortgage payment at some point when the lender arbitrarily increases the mortgage payments to have you pay the mortgage off on a faster pace as per your agreement.

Option 2

Increase your mortgage payment by $13 per 100k of the mortgage balance.   BUT you can only do this once per year with most lenders so you might want to anticipate 2 rate increases this year (2022) and set the payment on your variable rate mortgage higher.  E.g. 500k of mortgage with two rate increases of 0.25% would require a 2x5x$13 = $130 increase.  If you guessed wrong and there were three increases by the end of 2022 deploy option 3.

Option 3

Use the Lump Sum Pre-payment privilege.  Almost all lenders allow you to pre-pay the principle with a lump sum that reduces the principal.  Very few will ever exceed the lenders' prepayment privileges that are at a minimum of 10% of the original borrowed.  Prepay 1000 per 100,000 where you have 60 months remaining.  

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