In a climate where the Bank of Canada (BoC) has increased the interest rate time and time again over consecutive months, it’s no surprise that many have been paying attention to the current prime rate and what that means for their wallets–and more importantly, their mortgages.
When it comes to loans (like car loans and Home Equity Lines of Credit) and credit (like credit cards)–most financial institutes will charge customers the prime rate–or the “best” rate. These rates are the annual interest rate you’ll have to pay on their loans and credit. The Bank of Canada adjusts this rate on a periodic basis so it’s important to keep an eye on the mortgage rates if you’re on a variable or looking to buy.
Although banks and other financial institutes offer a prime rate, this is based on the bank rate set by the Bank of Canada. This is the interest rate the BoC charges for loans and private banks.
If the bank rate rises, banks and financial institutes gain that borrowing cost. To help offset these costs, banks and financial institutes then hike up their prime rates. However, if the bank rate set by the BoC drops, banks will also lower their prime rate–and while each bank is different, they tend to settle around the same prime rates.
To understand if the prime rate will affect your mortgage, it’s important to differentiate between the two types of mortgage rates you can get in Canada: a fixed-rate and a variable-rate.
When you choose to sign a mortgage with a fixed interest rate, you’ll be paying the same rate over the course of your mortgage term, until it’s time to renew. This means that whether the prime rate goes up or down, your monthly payments will stay the same. Generally, if you want stability in your monthly payments, a fixed-rate mortgage might be the ideal choice for you.
When you choose a variable-rate mortgage, your rate will generally be calculated as the prime rate plus or minus a certain percentage. That’s why, when the prime rate goes up or down in Canada, your mortgage rate will increase or decrease too. While you may not have the stability you would with a fixed-rate mortgage, variable mortgages often offer a lower interest rate compared to a fixed-rate mortgage.
So what do you do if your variable rate keeps increasing? The great thing about a variable-rate mortgage is that you can convert to a fixed-rate mortgage at any point–it’s important to keep in mind, though, that you’ll have to lock in at whatever the current fixed-rate is at the time you choose to switch.
Overall, there are pros and cons to choosing a fixed-rate mortgage or a variable-rate mortgage, but if you have chosen the latter it is definitely beneficial to keep an eye on the Bank of Canada’s rate increases or decreases.
But if you need more advice, get in touch with your mortgage agent to figure out if now is the time to lock into a fixed-rate. Need a second opinion? Get in touch with one of our mortgage agents to see if switching to lock in is right for you.