Bank of Canada Increases Key Lending Rate
2017-07-13 | 06:54:34
Yesterday, the Bank of Canada increased its key lending rate from 0.50% to 0.75%, marking the central bank's first rate increase since 2010. In turn, most lenders responded by increasing their prime rate to 2.95%, up from 2.70%. The notable exception being TD Canada Trust, which had its Mortgage Prime rate set higher at 2.85% even prior to the BOC announcement and has now increased it to 3.10%.
The rate change will result in an increased cost of borrowing for variable rate mortgages and home equity lines of credit (HELOCs), as well as other products tied to prime such as unsecured lines of credit and bridge loans.
It is worth noting that in 2015, the last time the key lending rate was at 0.75%, prime was at 2.85%. At that time, the rate had dropped 25 basis points from 1.00% to 0.75% but not all of the savings were passed on to the consumer. Prime was only reduced by 15 basis points from 3.00% to 2.85%. Ideally, prime would have been 2.75%.
In this instance, however, with rates going upwards, the banks have passed along the full 25 basis point increase to borrowers.
What should you do if you have a variable rate mortgage?
It would probably be best to stay the course and here's why: chances are your 5 year variable rate is still lower than most 5 year fixed rates right now so locking in might not be worth it. Plus, you still have the benefit of paying a 3 month penalty should you need to get out of your mortgage, which is often much lower than the interest rate differential used to calculate penalties on fixed rate mortgages. Finally, you were most likely approved for your variable rate mortgage using a much higher qualifying rate so you already have a buffer in place.
Many of the relatively new buyers who are in their first or second term with a variable rate mortgage have never seen an increase since they've been homeowners so it would be understandable if they are feeling a little uneasy. But the rate increase only brings us back to where we were just a couple of years ago. Certainly nothing to panic about.