The Bank Of Canada (BoC) Just Changed How You Pay Your Mortgage

This year, for the first time since the Covid crisis, the Bank of Canada changed the interest rate to 0.5 per cent, compared to 0.25 per cent where it was established during the ‘08 financial crisis. 

For those connecting the dots, those ultra low interest rates lit a match to the Canadian housing market, and now the game has changed, which leads us to the question, how has it changed?

Impact On Fixed Rate Mortgages

The brief answer is none. Fixed-rate mortgages interest rates are based on bonds issued by the federal government, not the Bank of Canada’s benchmark rate, which means that they will remain the same unless the mortgage is renegotiated or renewed. 

Impact On variable Rate Mortgages

Interest cost on variable-rate mortgages is attached to the lender’s prime rate, minus whatever you have negotiated. The prime rate guided by the BoC benchmark rate, whereby payments on variable rate mortgages may be adjusted to a higher rate to reflect the new prime rates.

However, some variable rate mortgages are expected to remain the same for the duration of the term, although as rates rise, more of your payment goes toward paying interest and less goes toward the principal. This means that the new rates will  increase the amount of time it takes to pay off your mortgage, unless you increase payments on renewal.

Advice For Buyers

The Bank of Canada raised its rates in order to slow down inflation, and that could signal the end of variable rate mortgages for the near future because previously holders of a variable rate mortgage were saving up to one percent on their mortgage compared to fixed rate mortgages. 

Traditionally, the demand for fixed rates mortgages increases  as interest rates grow, however, savvy borrowers understand that that rates are cyclical. Variable rates almost always outperform when the prime rate rises above the five-year average.

It is predicted that sometime in the next 12 months, the Bank of Canada will increase rates back up to “neutral,” If this occurs, the bond market will prepare itself for an economic slowdown, which will mean that it is only a matter of months or quarters until bond yields fall, fixed rates fall and finally the overnight rate falls and during those downward cycles is when  variable rates are more favourable.

As always, we suggest you speak to one of our mortgage specialists at AG Mortgages for a full, in depth explanation. We will work one-on-one with you and help you understand the current rates, and which mortgage is best for your needs.