On May 14th the Bank of Canada’s benchmark (BoC) rate, commonly referred to as the “benchmark qualifying rate", increased from 5.14% to 5.34%. This increase was, in large part, brought on by the big 6 Banks increasing their posted rates in recent weeks.
How does this impact me (as a borrower)?
All insured (less than 20% down payment) mortgages are qualified at the BoC rate. Additionally, some renewal situations are also based on this rate. This means many borrowers will have to qualify at this higher interest rate which will reduce how much you can afford. On average, this translates to a decrease of 1-2% in what a borrower can qualify for.
Some lenders are still honouring the old benchmark rate on pre-approvals for insured mortgages submitted prior to the increase on May 14th. The mortgage must fund within the rate hold period.
Another impact of this increase is higher penalties if you break your mortgage term early. Not only are the big 6 Bank’s posted rates used to determine the BoC rate, they are also used to determine the penalty fee for paying out your mortgage prior to maturity. Bank mortgages have a higher penalty for breaking their mortgage because a major part of their penalty calculation is based on the difference between the actual rate on your mortgage and the bank’s posted rates. If you are given a rate of 3.64% and the bank’s posted rate is 5.14%, that 1.5% “discount” they gave you, is used in your penalty calculations. Now that the bank’s posted rates have increased, the spread between the rate on your mortgage and the posted rate will be bigger which makes your penalty fees bigger as well. This can increase your penalty by thousands of dollars, depending on the size of your mortgage.
If you think you will find yourself in a situation where you are paying out your mortgage early, it may be worth it to take advantage of the allowable pre-payment privilege and pay down extra to reduce your penalty.
If you are purchasing or renewing, obtain a pre-approval, and always get a 2nd opinion (other than your current mortgage lender) on what your options are.
Why It Happened
Banks base their actual fixed rates on Government bond yields which have continued to increase and are now at their highest mark in almost seven years. As to why the big banks have increased their posted rates, that’s not always clear as their method of determining posted rates is not publicly shared. While we are not privy to how they determine their posted rates, we do know that the BoC rate is primarily based on the averages of the big bank’s posted rates. The recent increase was based on what the banks did with their posted rates. Scotiabank increased their 5-year fixed posted rate from 5.14% to 5.34%; CIBC from 4.99% to 5.14%; RBC to 5.34%; TD to 5.59%; and BMO to 5.19%. This led to the increase in the BoC rate to 5.34%.
What to Do
Speak with your mortgage professional today to find out how these current, and potential future, rate increases affect your financial situation. The recent BoC increase has been in the news, including a good article in the Globe and Mail by fellow mortgage broker Rob McLister https://www.theglobeandmail.com/investing/personal-finance/household-finances/article-how-to-handle-rising-mortgage-rates/