Prime rate increase by major banks to 3.45%, in relation to the recent key interest rate increase. The Bank of Canada raised the policy interest rate a quarter of a per cent on Wednesday. The third key rate increase in under a year, after a lengthy record low. A move by the national bank in light of a growing and healthy Canadian economy.
Prime rate and key rate, how are they connected?
The key rate, policy interest rate, is determined by the Bank of Canada. It is a rate that affects the return on savings and investments and influences the rate of consumer mortgages and loans. It can also affect the exchange rate of the Canadian dollar. In short, a key rate increase is great for investors and savings accounts, not so good for borrowers.
The key rate influences the prime lending rate. When the key rate goes up there is a good chance that the prime rate of major banks will climb.
What the prime rate increase means for variable rate mortgagors
The increase can mean over $100,000 added to the life of a variable rate mortgage, with an amortization of 25 to 30 years. In a shorter sight the prime rate increase can add more than $100 to monthly payments.
Due warning, the Bank of Canada will likely continue its steady interest rate hike
This won’t be the last key interest rate increase and in turn it won’t be the last prime rate increase. It likely won’t be the last rate increase considering that the interest rate has been at record lows for several years
. The quarter interval increases are a steady pace climb to a higher interest rate.
It’s important to note that the key rate is the highest it has been since 2009, but that it is still 3 per cent lower than the peak 10 years ago. There is still plenty of reasonable growth for the key rate to see in light of a near decade of record low interest rates.
Even if rates aren’t going to keep pace with the past two quarters, there is no way that they are going down. The only thing that could slow the pace of interest increases is a slowing Canadian economy. A slower economy won’t stop the interest rate increases but delay them to later dates.
The key rate will increase, but maybe not at the pace it has been for the past two quarters
The only thing that might slow the pace is the results of the outcome of the NAFTA renegotiation. A delayed renegotiation process that has been dragged on from last summer into this year. The growing and healthy Canadian economy could take a hit if Trump does anything reckless, like leaving the NAFTA.
Considering that the BoC will likely continue to steadily increase the key interest rate over the coming year, there are important things to consider for your mortgage.
Save money and fix your rate before another prime rate increase
In light of likely future increases it’s important that when you get a mortgage you go for a fixed-rate mortgage.
In short description a fixed-rate mortgage will lock in your interest rate for the term of your mortgage. A variable rate on the other hand will allow you take advantage of a changing rate, though the only advantage is when the interest rate change is in decrease.
Advice on the key interest rate increase
It wouldn’t be advisable to be taking a variable rate mortgage over the next year or two. If you are a mortgagor and you have a variable rate mortgage we’d advise that you take the next best opportunity to switch to a fixed-rate.
Though it will be unlikely that many have a variable-rate mortgage, considering the several years of record low interest rates. A record low that would only inspire borrowers to take advantage of it by securing their sweet rate.
There are reasons for going for a variable rate mortgage. If you're one of those borrowers, we can help
you switch to a fixed-rate mortgage. A move that will lock in your current available rate before we see another increase, at the earliest late winter or early spring.