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We’ve looked at both sides of the argument for and against a rate increase

Uncategorized | David | July 9, 2017

We are fence sitting probably just as much as the Governor of BOC, Stephen Poloz. This is not a simple decision and one that could still be tabled for 2018.

The US has increase their rates three times consecutively in the past year and every time this happens our dollar gets weaker. We’ve lost nearly 25% since the high of near parity to USD in 2011. The Loonie raised $0.02 to $0.776USD on the rumours of an increase to Bank of Canada’s Prime rate and one can be certain if they do not raise rates the Loonie will react negatively. Poloz might have his hands tied in an effort to maintain a marginal pace with the US who has been gaining serious economic ground since Trump took office late last year.

A falling Canadian dollar is good for our tourism industry, real estate (driven significantly by overseas buyers and speculation), as well as exports. A falling dollar though poor for manufacturing (a pretty near non-existent industry in Canada anymore), oil & gas which is still under performing, import related businesses and many consumer goods.

A rising dollar and rates historically have boosted savings rates, consumer spending and confidence. For the past few years our economy has been driven from housing and debt-financed consumption. A raise in rates could be sound reasoning by BOC to rein that in as household debt has been a main topic of warning from our Government. Raising rates and inflation have been a positive for many economies past and present.

I’ll stop boring you with the many reasons for why an increase can happen and focus now on how Canadians will be effected with their mortgages…

If you’re in a Variable mortgage right now chances are you’re hovering around Prime – 0.50%. Currently Prime rate for Banks (except TD who arbitrarily raised their Prime by 0.15% last year) is 2.70% so a mortgage holder is paying 2.20%
Let’s use a mortgage of $500,000 and a 25 year amortization schedule. Your current payment would be $2160/month. If BOC raises by 0.25% and lending institutions follow suit the monthly payment will increase by $65 to $2225/month

Comparatively if one were to lock in to a current 5 year fixed at 2.99% the monthly payment would increase by $200/month to $2365

Our most prudent past clients have already been paying as though they took a higher fixed rate. This is called an “Inflation Hedge Strategy” and it dramatically reduces the principle balance of ones mortgage. We still love Variable rates even with a slight increase because it offers a great deal of flexibility and likely still lower payment. If you have an extra $200 per month you can throw down against the principle balance of your mortgage we say “Do it.”

If the Bank of Canada does increase Prime chances are lenders will in turn offer further discounts off their Variable mortgages and it will continue to remain our favored product. For now our clients are holding tight and we are creating individual plans tailored for everyone’s differing need post announcement July 12th. If you have specific questions about your mortgage please do not listen to the fear mongering, profit maximizing bank rep or person who paid 20% on their mortgage nearly 40 years ago who are hounding you to lock in your rate to a Fixed rate. Instead please call us first and together we will make the most educated decision for your needs  🙂

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