What if Mortgage Rates rise?

Rumour has it mortgage rates could be going up. The Bank of Canada (BoC) has dropped some hints that a hike to the overnight rate (the main policy interest rate in Canada) could be coming. The overnight rate has a direct effect on the prime rate, the rate on which variable mortgage rates are based. It’s been a very long time since an interest rate hike has happened.

In fact, the last time the BOC raised rates was in September 2010. A lot can happen in seven years, so we don’t blame you if you forgot what happens if mortgage rates rise.

Here’s a refresher:

If you already have a mortgage, there are a few possible scenarios for.  Let’s start with the simplest scenario. If you have a fixed-rate mortgage, nothing will happen. That’s it. Fixed rates are locked in for the entire mortgage term—most commonly five years. Your rate is guaranteed not to change in that time regardless of what happens in the market.

 

If your fixed-rate mortgage is up for renewal soon, you can rest easy because fixed mortgage rates are influenced primarily by bond yields, not the prime rate. And today’s best mortgage rates—fixed or variable—are substantially lower than they were five years ago. There’s a chance fixed-rate mortgages could rise, but not as a result of anything happening at the BOC.

 

If you have a variable-rate mortgage and you’re concerned about your ability to handle higher payments if rates go up substantially, you might consider talking to Noble Mortgages about switching to a fixed-rate mortgage. You will pay a higher mortgage rate up-front, however, you will be protected from further rate increases in case rates spike over the coming years.

 

If you are a first-time homebuyer with a down payment of less than 20%, you can be rest assured that your mortgage affordability will not change—at least not the maximum amount you can borrow. That’s because your maximum affordability is usually based on the Bank of Canada’s benchmark qualifying rate, which is an average of the big banks posted five-year fixed rates.

What will the rate hike look like?

Historically, the BOC has raised and lowered rates in increments of 0.25 percentage points, and the banks have adjusted their prime rates in lockstep.

Nevertheless, there have been exceptions to this rule in the last few years.

It’s possible that when the BOC rate goes up, the banks will raise their prime rates by only 0.15 percentage points, but it’s much more likely that they will pass on the full 0.25 percent point increase to their customers.

Chances are, if the BOC announces an interest rate hike, variable mortgage rates will increase by 0.25 percentage points.

But whether a rate hike is actually going to happen is also an important question. There are some analysts who don’t think an increase will come until much later this year, if not 2018.

For more information on mortgage on the rise call us today Noble Mortgages at 416-241-2227 or email us at info@noblemortgages.ca