Mortgage brokers received a particularly large number of calls from anxious homeowners on Wednesday, following the announcement of a 0.25% increase in the Bank of Canada’s key interest rate. But there is no need to panic, assures Stéphanie Potvin, mortgage broker at Hypotheca and former vice-president of the Association of mortgage brokers of Quebec, who answers a few questions.
What do you say to people to reassure them?
People who have taken a variable rate in the past have generally been advised that it was a good strategy for them. Variable rates are still, by far, lower than fixed rates, so it remains a good strategy to stay at variable rates. Conversion to fixed rates is not recommended for the majority of cases. Unless the person tells me they can’t sleep because they’re too worried.
How much lower is the variable rate?
Most lenders are now increasing their prime rate, or base rate, from 2.45% to 2.70%. Except that the majority of financial institutions issue a discount on the base rate equivalent to approximately 1.2%. The variable rate offered will therefore go from plus or minus 1.25% to 1.50%. This is still a far cry from fixed rates, the best offers of which are around 3%.
Will the 0.25% increase make a significant difference to homeowners’ portfolios?
So far, not really. For a $300,000 mortgage, which would have its rate at 1.40% increased to 1.65% over 25 years, the increase will be approximately $35 per month. Generally, their institution will send them a notice of an increase in their payments.
So for people who are going to take out a new mortgage, is the variable rate still a good solution?
Everything will depend on the needs of the client and his financial situation. For some people who have less tolerance for risk, the variable rate may not be suitable. But for people comfortable with rate variations, or who are looking for more flexible types of financing, it’s better, because the penalties are lower than with fixed rates. It will remain a very popular product for a good number of clients who renew their mortgage or buy their property. It makes sense to do business with a broker to find the right option for you. For example, some lenders may offer us a fixed payment, to compensate for increases, so that the customer does not realize that the rate is changing. [mais il paye moins de capital à chaque versement et la durée du prêt augmente].
However, interest rates will continue to rise…
It would take six increases of 0.25%, or three of 0.5% to catch up with the fixed rate, which gives some leeway.