The Bank of Canada announced another rate hike to the overnight lending rate (which is what the banks base their prime rate on) again by .25%, going to 1%. Subsequently, the banks moved up .25% as well. The reason for the move was impressive growth that was nearly triple the previous quarters’. 

After the previous rate hike earlier in the year, Stephen Poloz put the country on notice that they may be raising again during 2017 and with strong data in July and August, they decided to hike the rate. 

Now, this is in general good news for Canadians. It means that most provinces are not in a recession (with AB finally climbing out of the hole) with strong economic growth almost across the board. Keep in mind too that the reason for the rate decreases in 2015 was primarily due to oil price concerns, and with AB in the black again it was a fairly easy decision to go back to square one again.

The question we’ve been getting a lot is should we lock in our variable rate mortgages? Keep in mind that fixed rates have gone up over the past few months, so you’ll likely be locking in to a rate over 3%. Many of you with variable rate mortgages will still be lower than the fixed rate you would be locking into. 

More importantly though, is the potential penalty to break a 5yr fixed rate mortgage compared to a variable rate mortgage. The penalty is max 3 months interest in a variable and either 3 months interest or an IRD (Interest Rate Differential) in a fixed rate. I wrote a good blog post about how the banks calculate these penalties (in an unfair way) that you can read here. We have found that currently this penalty is about 5x more expensive than the 3 month interest penalty. Recently we ran an estimation for a client who’s penalty would be $9,000 if they took a variable and between $47,000 – $54,000 to break a 5yr rate if they cancelled it in 1-2 years. WOW!

Many of you are probably thinking that you won’t be breaking your mortgage. But believe it or not, 6/10 borrowers who take a 5yr mortgage break it early. That’s much higher than you would expect. Life happens.

So what should you do? We are still advocating sticking with the variable. There will be ups and downs (right now is an up) but this world is still very volatile and there are still a lot of things that can happen. F