Jul 07 2017
There are speculations that overnight rates might increase in coming days. Fueled by none other than Bank of Canada (BoC). An increase in overnight rates has a direct effect on prime rate. Now, the question is how it affects your chances of getting the best and lowest mortgage rates? Before we get to that, let’s discuss prime rate.
Prime rate is the annual interest rate that is used by major banking and non-banking institutions of Canada to set annual interest rates for variable-rate mortgages, lines of credit, and variable loans. Prime rate is the main decisive factor that determines the variable interest rate that you’ll pay on your mortgage.
There is a positive correlation. As overnight rates increase, prime rates increase as well. Overnight rates are decided by Canada’s apex bank, Bank of Canada. Whether overnight rates will increase or decrease depends on the monetary policy that’s being adopted by the central bank and what objectives it wishes to achieve.
As there hasn’t been an increase in overnight rate for quite many years, it can happen shortly.
If you have the usual 5-year fixed mortgage rates, you can continue chilling on your recliner. You don’t have to worry at all. Fixed rates are constant throughout the mortgage term, be it 5 years, 7 years, or so. It’s free from effect of market forces so you’re quite safe. If these do rise, it’s not because of rise of prime rate.
On the other hand, people who opted for variable mortgage rates, their mortgage rates will oscillate along with prime rate, with the same wavelength. So, it doesn’t matter if you procured the best and lowest variable mortgage rate at the time of purchasing mortgage, it’s not stable. With a rise in prime rate, you’ll end up paying greater interest on the outstanding balance of your mortgage.
If you have a variable-rate mortgage, talk to your mortgage broker ASAP. Nothing to worry if your mortgage brokers are Mortgage Division, the best in Toronto. You can ask to get your variable rate mortgage converted to fixed-rate mortgage. That way, you’ll be immune to changes in prime rate before it actually happens.
In mortgage business, anticipation is the key to making smart moves. We hope you make yours sooner than later.