1. Fixed-rate mortgage holders are not affected by Bank of Canada rate changes during their current term. Only those in either adjustable-rate or variable-rate mortgages need read on.
2. On July 12th lenders increased variable-rate borrowing costs by 0.25% to match the Bank of Canada increase of the same amount on the same day.
3. There are three more scheduled Bank of Canada meetings this year, and there remains doubt about any further increases this year. Few expect anything more than a 0.25% further increase.
4. This was the first increase to Prime in nearly seven years, and it follows two 0.25% reductions in 2015.
5. A 0.25% rate increase equals a payment increase of $13 per month per $100,000 of outstanding mortgage balance for those in an adjustable-rate mortgage. That means a $300,000 mortgage balance will see payments rise by $39 per month.
6. Not all payments increase. Several lenders differentiate from an adjustable-rate product by offering what is called a ‘variable-rate’ mortgage and their clients will not have any payment change at all. Instead, the life of the mortgage is extended slightly. A letter in the mail from your lender should be arriving to confirm which camp you are in.
7. There is no penalty or fee to convert to a fixed rate. Whether in an adjustable-rate mortgage or a variable-rate mortgage, you have the option of locking into a fixed-rate at any time without cost. The length of the term offered varies according to policy and remaining time to maturity, with some lenders allowing conversion to a three-year fixed from day one, but most ensuring they have you under contract for the full original term.
8. Locking in can be very costly. The prepayment penalties differ significantly between variable- and fixed-rate products. Be careful about locking in. Aside from immediately increasing your payment even further, you stand to increase your potential prepayment penalty by up to 900%. Few think they will trigger a penalty, yet more than half of borrowers actually do.
9. No surprises. Mortgage lenders failed to give us the full 0.25% decreases in 2015, instead only reducing rates by 0.15% both times. Counting on our short memories and lack of uproar, lenders chose to increase by the full 0.25% on July 12th, rather than doing what would have been fair and only increasing 0.15%.
10. Future increases will depend largely on consistent economic good news. This is what drives interest-rate increases.
Jean-Guy Turcotte is an accredited mortgage professional with Dominion Lending Centres-Regional Mortgage Group in Red Deer.