(June 25, 2023)
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Consumer spending habits are causing central banks worldwide to be concerned. In Canada, many believed that there would be a sustained pause in raising the overnight rate. However, a few weeks ago, the Bank of Canada surprised everyone with a 25-point increase, leading to a rise in the prime rate from 6.70% to 6.95%. Suddenly, we found ourselves in a similar situation to what we experienced in October when fixed rates surged from the 4’s to the 5’s. Moreover, there is speculation that another 25-point increase may be announced on July 12th.
While it may seem like we can only sit and wait until the next announcement, there is more to consider. For instance, the Bank of Canada announcements and their impact on people’s mindsets, both at home and in boardrooms, as well as in the mortgage marketplace across the country. It’s important to note that the interest rates mentioned in these announcements relate to the overnight lending rate, which currently stands at 4.75%. This rate is what banks charge each other when lending money. Banks must maintain a minimum reserve of cash to ensure liquidity in the banking sector. When they fall short of this requirement, they borrow from banks with surpluses. Consequently, when the overnight lending rate changes, banks typically pass on the increase or decrease to their customers through Prime Rate. Currently at 6.95%, Prime Rate is 2.15% higher than the overnight lending rate, representing the banks’ profit margin. This rate adjustment immediately impacts any financial product linked to Prime Rate, including credit cards, personal lines of credit, car loans, and variable rate mortgages.
Indirectly, fixed rate mortgages are also influenced by these changes. However, there is a significant difference in the way fixed rates behave compared to the orderly adjustments of Prime Rate. Fixed rates do not have a formal announcement date or an explanation for rate changes. This lack of transparency often catches people off guard when they inquire about mortgage renewals, purchases, or refinancing. While individuals may believe they are well-informed after hearing the Bank of Canada rate announcement on the radio, fixed rates have fluctuated as much as 50-75 basis points before or after these announcements, without any prior notice or media coverage.
In summary, while the Bank of Canada announcements provide macro-perspective information that offers clues for mortgage decisions, it is crucial to recognize their limitations. Mortgage seekers need to consider a wealth of information regarding fixed rates, term lengths, rate variations, and amortizations. This micro-perspective detail can make a significant difference in their mortgage outcomes. Unfortunately, fixed rate changes are rarely publicized or covered in detail by the media due to their volatility and the multitude of available rates and terms. Keeping track of these changes can be challenging even for mortgage brokers. Therefore, if you’re in the market for a mortgage, whether it’s for a purchase, refinance, or renewal, it’s essential to seek advice from a micro-perspective rather than relying solely on the vague macro-environment portrayed by Bank of Canada announcements. While the Bank of Canada’s information is valuable, it doesn’t fully translate to the complex spectrum of mortgage products available in the marketplace. Conduct thorough research and gather as much information as possible before making any decisions.
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