Yes, The Bank of Canada did it Again! They Raised their Rates and caused an increase to Variable Rate Mortgages (VRM) and Home Equity Lines of Credit (HELOC)
As you may know by now, On October 14th, 2018, the Bank of Canada announced a rate increase to the Prime Rate by 0.20%, which in turn resulted in the Prime Lending Rates to move from an already high 3.70% to an even higher 3.95%.
Personally, upon hearing this news, I am not to thrilled. I am guessing you are not either, and to make things worse there is word that the Bank of Canada is not done raising the Interest Rates and that there will be another Rate increase in the near future.
So who is affected by this rate Change and what does this mean?
Immediately, individuals holding a Variable Rate Mortgage or a Home Equity Line of Credit Mortgage (HELOC) are affected as their rates have increased as a result of this news.
Individuals who have a Variable Rate Mortgage (VRM) will see their Rate will increase In turn this will increase their monthly mortgage payments. This is because the a variable rate which is usually the lowest rate offered by the Banks and Lenders but they are subject to rate increases when the Prime rate increases.
So you are basically trading the best rate offered at the current time for a potential increase in payments and interest rate in the future.
When you are getting a Variable Rate Mortgage (ARM), the Mortgage Rate you will receive will be minus the prime rate.
So if you have a $500,000 Variable Rate Mortgage of Prime Minus -0.80% then the rate would be (3.70% -0.80% = 2.90%) with a 25 year amortization your Monthly Mortgage Payments would be $2,341.
But with the new Rate increase that rate would now be (3.95% – 0.80% = 3.15%) with the same 25 year amortization your New Monthly Mortgage Payments would be $2,405.
that’s a difference of an increase +0.25% in the rate (a quarter of a percent) and a Monthly increase in payments by $64. Which over a year would equal to $768.
A Home Equity Line of Credit (HELOC) is a very popular Mortgage financing option which home owner can take advantage of as it allows you to take the equity in your home and access it as Line of Credit at Low Interest Rate and use it for whatever you need it for. However Home Equity Line of Credit (HELOC) is but they are subject to rate increases when the Prime rate increases.
So you are basically trading the flexibility of being able to access your homes equity in the form of a Line of Credit at much lower Rate than a Personal Line of Credit for a potential increase in payments and interest rate in the future.
When you are getting a Home Equity Line of Credit Mortgage (HELOC), the Mortgage Rate you will receive will be plus or above the prime rate.
So if you have $500,000 Home Equity Line of Credit (HELOC) and but in reverse, as Home Equity Lines of Credit (HELOC) are Prime Plus product offered.
So if you have a Rate of +0.50 then the rate would be (3.70% + 0.50 %= 4.20%) with a 25 year amortization your Monthly Mortgage Payments would be $2,685
but with the new Rate increase that rate would now be (3.95% + 0.50% = 4.45%) with a 25 year amortization your Monthly Mortgage Payments would be $2,753.
That’s a difference of an increase +0.25% (a quarter of a percent). and a Monthly increase in payments by $68. Which over a year would equal to $816.
Now you might say that’s not that much that’s like $2.30 a day increase if you want to look at it on a per day basis, but when the rates are increased again by the Bank of Canada then your payments would be increased even more, possibly doubling the amount above.
A question that I am asked a lot by clients is whenever the Interest Rate increases is,
“Rumy, Should I Lock into a Fixed Rate Mortgage, instead of keeping my Variable Rate Mortgage or HELOC?“
Honestly, there is no one answer for this question, this is because everyone has their own specific goals, needs, wants when it comes to their Mortgage financing. Some like the flexibility of a Home Equity Line of Credit (HELOC) where they can borrow what they want and only pay for what they use. Others like knowing that the are getting the best possible rate and don’t want to pay more interest than they have to. Others like the stability of fixed payments, knowing exactly how much their monthly payment will be and creating a budget around that.
If you want to gain a better picture of whether you should lock into a Fixed instead of keeping with a Variable Rate Mortgage (VRM) or how you can have the right Mortgage Financing in place to protect you against any future rate increases, then you should Contact me, by giving me a call at (647) 464-3939 or filling in the get in touch with us form or by simply emailing me at Approved@MortgagesInGTA.ca
I will work with you to go over all your options in detail and see if the Mortgage you currently have is really the Best Mortgage that suits your needs today and moving forward, or if you require a more up to date and personalize Mortgage solution which will help with lowering your monthly debts and monthly mortgage payments.
Written and Published by: Rumy Gill – Mortgages In GTA,
Date: Friday November 1st, 2018
Tel: (647) 464-3939
Brokerage Lic# 10428