With most lenders, your regular mortgage payments will increase the first payment following a prime rate increase. However, some (more likely a bank than a monoline) set a payment at the start of the mortgage term and do not adjust the payments when their prime rate changes. Clients need to be aware if this is the case with their mortgage as they may want to adjust payments if there is an increase in the rate. If payments are not enough to cover principal and interest the balance will be added to the mortgage balance. If you are not sure, then this is a good time to review your mortgage.
The discount you receive on the prime rate will not change from your original contract. If your mortgage contract says that you pay prime minus 0.35% and the prime rate is 2.70%, the interest charged is 2.35%. If your lender’s prime rate changes to 2.95%, your new interest rate will be 2.60%.
Please note that the banks base their prime rate on the Bank of Canada’s overnight rate but they set their own rates. Most of the monolines/banks have a prime rate of 2.95%, as of this article date, except for TD at 3.10%.
Fixed rates increased slightly in anticipation of the overnight rate increase, however the 2 are not tied together. Fixed rates fluctuate based on the bond rate.
Although rates have increased we are stilling seeing historically low rates. Here are the range of prime rates by decade: (Taken from CIBC historical data.)
1970s 10.50% to 15.00%
1980s 8.75% to 22.75%
1990s 4.75% to 14.75%
2000s 2.25% to 7.50%
2010s 2.50% to 3.00%
We are still in the lowest range of prime rates in the last 20 years.
Lenders are quick to raise rates but slow to lower. This was the first increase in the overnight rate in 7 years. Back in 2010 the overnight rate was increased by 0.25% and lenders followed suit with a 0.25% increase to their prime rates. In 2015 when the overnight rate dropped by 0.25%, lenders only dropped their prime rates by 0.15%. This happened twice in 2015. And why are they so quick to raise rates? Bottom line is – profit. With interest rates still so low they are not making the profits they were back in the 80s and 90s when they could charge 15-25% interest, granted they would actually pay interest of more than 1% on a savings account back then too.
With the changes in prime and interest rates in general, it is the perfect time to review your current mortgage and see if what you have is the right fit for you. Please contact us today.