Canada’s prime rate has increased to 2.7% from 2.45% in 2021. Yes, it’s still an all-time low as per historical standards, but it hasn’t been this high since early 2020. What’s more, is this interest rate is anticipated to shoot up several more times this year with the rising inflation level.
But what exactly set off this increase in the prime rate in Canada? Well, on March 2, the Bank of Canada divulged that it was doubling its key lending rate, setting it at 0.5% from 0.25%. Moreover, this financial institution added that more surges should be expected, thanks to Russia’s invasion of Ukraine.
Typically, top Canadian banks such as the Toronto-Dominion Bank (TD), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC), Bank of Nova Scotia (Scotiabank), and Royal Bank of Canada (RBC), determine their own prime rates. And they are usually similar. Still, the Bank of Canada’s ‘policy interest rate’ automatically impacts these interest rates, and right now, it has made it more costly for these institutions to access loans.
As a homeowner or a potential property investor, this should top your list of concerns as it will affect the following.
Variable Mortgages
A variable-rate mortgage is a home loan with an adjustable interest rate, and it’s always tied to the prime rate. Therefore, the interest you pay on yours will increase over your repayment period, meaning you’ll pay back a higher sum than anticipated. The change could happen monthly, every half a year, or annually, depending on your lender and the terms of your mortgage.
If you have a fixed-rate mortgage, you are on the safe side, though. Your interest rate was cemented when you took your loan, and it cannot be affected. Even so, new borrowers may have to deal with higher interest rates because of the current prime rate hike. This might discourage some of them and make it impossible to access the money they need to make down payments, shattering their dreams of becoming homeowners.
Purchasing Power
Canada’s prime rate increase will also influence prospective homeowners’ purchasing power. With higher mortgage rates, homebuyers are likely to have a tough time accessing loans to purchase homes. Consequently, this will lower the demand for real estate, reducing home prices, which could be super ideal for those looking for affordable properties for sale.
Nevertheless, it’s worth noting that lenders aren’t the same. They come with different interest rates. So if you intend to apply for a mortgage, shop around to find one that suits your individual needs based on your current budget and repayment plan.
The chances of a decrease in the prime rate in Canada are slim. So if buying a home was on your list of must-do things in 2022, you might as well take the risk. Of course, getting a mortgage may not be the most straightforward task, but you can still have yours approved if you follow the proper procedure. Be sure to factor in the pros and cons of a fixed-rate mortgage and an adjustable-rate mortgage to identify the loan that fits your needs perfectly.
