Tuesday, November 6, 2018

No need to panic after rate increase

No need to panic after rate increase




You may have already seen the more technical BANK OF CANADA RATE ANNOUNCEMENT on October 24th, or you may not have. The Coles Notes (the simplest version) are as such:
  • Global economy remains strong, the USMCA will reduce trading uncertainty
  • Canadian economy is balanced for the foreseeable 2 years
  • Household spending will increase, but backed by income growth
  • Housing activity across Canada is stabilizing

On October 24th the Bank of Canada did what we all expected, they increased the Overnight lending rate by 0.25% to 1.75%. This equated to a PRIME being increased by 0.25% to 3.95%. All variable rate mortgages and lines of credit utilize PRIME to calculate the current interest rate.
Now the BIG QUESTION, how do we as mortgage consumers respond? 
No need to ask me, I will tell you. Variable, with no hesitation. I will stay the course by not pushing the panic button.
WHY?
Because if I decide to move, re-finance, consolidate, leverage equity or to simply break the mortgage for any reason my penalty will only be 3 months interest. I also need to consider how much money I have saved over the term by utilizing a variable rate mortgage rather than a fixed. During my current mortgage the spread between variable and fixed is approximately 1%.
Real estate wealth is a long game, building net worth doesn’t happen overnight. Gains are not made in the short term. Just like other markets (stocks, bonds, mutuals, GICs RRSPs), there will be highs and lows.
What does this increase mean?
Dollarize it for your own personal consumption. For an increase of 0.25% the payment will go up $13 per every $100,000 borrowed. For some variable rate borrowers, the payment hasn’t even changed as the lender only adjusts the principal and interest allocation.
Now the question becomes, what do you do? Remain with variable or lock into a fixed. I recommend staying the course.

Thank-you Michael Hallett DLC Producers West Financial for this article

Post a Comment