Last week the Bank of Canada increased the overnight rate, the rate at which it lends to other institutions, by one-quarter of a point to 0.5 per cent. No biggie — yet. If you have a fixed rate five-year mortgage, as most Canadians do, nothing will change until the term expires.
And if your term is expiring soon you may actually see a slight decline as five-year fixed rate mortgages don’t move in lockstep with the bank rate, rather they are more affected by what goes on in the bond market. Last week many banks actually shaved a fraction off their five-year rates.
Over the next couple of years rates may climb by as much as two per cent and will likely rise by three-fourths of a per cent by year end — assuming European debt problems don’t worsen, no major wars break out and the United States isn’t visited by Subprime Mortgage Mess — Part 2.
If you have a fixed rate mortgage coming due within the next few years play around with a number of scenarios and see how they fit with your finances. For example, a one?per cent increase in a $200,000 mortgage at five per cent will cost an additional $116 monthly.
Things get more interesting with variable rates. Though these mortgages do move in lockstep with bank prime, you may not not see an increase because lenders typically build in a buffer so when rates go up you don’t have to pay more right away.
However, if your payments don’t rise you are still losing out because your amortization, the length of time to pay off your mortgage, lengthens.
For instance, if your rate goes to 3.5 per cent from 3.25 per cent on a $200,000 mortgage and your payments don’t change, $26.21 less will be applied to your principal monthly. If you have a variable rate ask your lender at what point you will be forced to increase your payments or increase them voluntarily to keep to the same amortization.
ALISON’S MONEY RULE
Don’t panic about mortgage rate increases yet but start preparing for higher rates to come.