WHAT ARE THE RATE HIKES?
The Bank of Canada increased its overnight rate to 0.5% on March 2, 2022.
The central bank watches the economy and ensures it performs smoothly and efficiently. One of its great tools is the interest rate adjustment. When inflation increases, the central bank can choose to ease the market by raising interest rates.
Rising interest rates are great for savers, but can be more expensive for borrowers. This encourages saving rather than spending. Also, this can help to decrease inflation by allowing supply to catch up with demand.
HOW OFTEN DO THESE HAPPEN?
The Bank of Canada plans to announce the interest overnight rate eight times in 2022. The announcement may or may not increase the rate. The central bank has not increased its rate since 2018 and it begins the first time in March 2022. The interest rate increase amount and frequency in the future are still undetermined.
The Bank of Canada anticipates seeing inflation fall to 3% by the end of 2022. As of January 2022, the CPI inflation is at 5.1%. Therefore, it may take a few rate increases to reach that expectation.
HOW DO THESE IMPACT MORTGAGES?
The rate hikes will not affect the existing fixed-rate mortgages. The interest rate is locked in until the current mortgage term ends.
The rate hikes will affect the existing variable-rate mortgages. Variable interest rates are associated with the Prime rates, which are heavily influenced by the central bank’s overnight rate adjustments. Therefore the variable mortgage rates go up when the Prime rate increases and drop when the Prime rate decreases.
Lastly, the rate hikes will affect both new fixed and variable rates. All new purchases, switch (transfer), or refinance mortgage applications will offer a higher fixed or variable rate for their mortgages.
HOW TO PREPARE FOR RATE HIKES?
A few options can help to prepare for the rate hike. One of the great ways to prepare for the future rate hike is to plan ahead. If the current mortgage is coming up for renewal, renew or refinance the mortgage early. This can secure the most current low rate and save more money on interest ahead.
If a purchase is happening soon, getting a pre-approval is another great way to prepare for the rate hikes. This process can not only understand the pre-qualified mortgage amount but also can secure the current interest rate up to 120 days. Moreover, a pre-approval can take advantage of a lower rate even if the rate drops during the 120-day rate hold period.
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