Do BoC rate changes impact my mortgage payments?

BoC rate changes are in the air…

When sailing a boat in a race, the crew onboard thinks about a lot of different factors that will impact their position on the racecourse. The sport is very tactical and mixes together other activities like chess and golf. The crew thinks about their position on the start line, where other competitors are on the racecourse, where the wind is coming from, and the strength of the wind in different areas of the course. Sailors are also constantly thinking 10 steps ahead. Thinking ahead offers them a better idea of what will happen in the future and the conditions that will benefit them.

For instance, what they saw on one part of the race may benefit them again in another part of the race. The same way of thinking goes for buying a home. Buying a home can become tactical in that you want to understand the market and how it will benefit you. You are thinking about a variety of factors that will influence the cost of owning a home. One of those important factors in buying a home is the mortgage rate. Mortgage rates will often fluctuate throughout the life of your mortgage. Understanding how BoC rate changes can impact your mortgage is an asset. Knowing how they work will help you predict and plan for what will happen in the future.

Components that determine mortgage rates

Both types of mortgages, fixed-rate and variable rate, are influenced by a variety of different components. For instance, inflation can cause mortgage rates to change since it progressively wears away at the purchasing power of money over time. Lenders and banks must carefully monitor inflation and adjust mortgage rates accordingly to ensure they are still making a profit. Moreover, lenders will look at economic growth.

While they look at both global and national economic growth, they will understandably put more emphasis on national economic growth. When there are high levels of economic growth, people are generally paid more and in turn, they spend more money. Those that are spending more money are also more likely to be taking out mortgages. This means that we will typically see lenders raise mortgage rates. While there are factors that impact both fixed and variable rates together, there are a few that specifically influence variable-rate mortgages.

Variable-rate mortgage

Variable-rate mortgages are a little easier to understand and less complex than fixed-rate mortgages. Variable-rate mortgages are influenced by the commercial banks’, like TD and RBC, prime rates. The prime rates are determined by the Bank of Canada’s overnight rate, which is currently at 1.75 per cent. When the Bank of Canada wants to stimulate the economy, it will lower the overnight rate. When the Bank of Canada wants to decrease inflation and cool down the economy, it will raise the overnight rate. Large banks like RBC and TD use the BoC rate changes, and overnight rate, as a benchmark tool. This means that when we see a change in the overnight rate, we can expect to see an equivalent change in variable-rate mortgages.

What can we expect?

Currently, experts predict that the Bank of Canada will keep the overnight lending rate the same. The economy in Canada isn’t showing signs of significant growth that would warrant a change in the overnight rate. There are still plenty of strengths in the Canadian economy right now, which means there will still be growth. The Bank of Canada will be reluctant to cut overnight rates because of the economy, but if the United States continues to cut its rates it may have no choice. If the overnight rate is left untouched, we are likely to see variable rates hold. However, if the Bank does decide to cut rates, we will likely see variable rates lower than what they currently are.

When looking for that tactical advantage for the perfect time to buy a home, look at the influences on variable rate mortgages. Understanding how and why rates change will help you figure out when to buy and better manage your finances when rates change. For more information on how mortgage rates are determined and how they affect you, talk to our experts at Clinton Wilkins Mortgage Team. You can give us a call at 902-482-2770 or get in touch with us here.