Prime Rate Increase July 2022

So, the Bank of Canada has just increased the Overnight Rate by 1%, which means the mortgage lenders’ Prime Rate will also increase by 1% and become 4.70%.  One percent is a big increase in one go, and consider also that Prime has increased by 2.25% in 2022.  It’s moved up far and fast.

How does this affect you?

If you have a fixed rate mortgage you will not be affected by the Prime Rate changes.  However, if your fixed rate mortgage renews in the next 6-12 months we need to look at your likely options at that time.  Contact me to discuss this.

If you have a variable rate (or adjustable rate) mortgage, well….let’s talk soon.  It can be pretty scary when mortgage lenders increase the Prime Rate by 2.25% in just a few months.  The general rule is that when your mortgage rate doubles, your payments increase by 25%.  When the rate triples, you payments increase by 45%.  That can be a huge issue for borrowers, given the mortgage is likely your biggest monthly expense item.

Will Prime increase again?

The BoC meet again in September, and will probably increase the Overnight Rate by 0.75-1.0%, so the Prime rate will increase likewise.  There is a potential for more increases into 2023, but it really depends how stubborn inflation is.  The longer it refuses to drop to acceptable levels, the more the BoC will need to increase rates, but even they have to be careful of not disrupting the economy too much. 

However, If Canada has to be pushed into a short recession, this may be necessary to bring inflation under control.

When will inflation be brought under control?

There’s no certainty on this.  Inflation is partly a result of factors inside Canada, but also impacted by worldwide issues such as Covid, oil prices, climate change and the war in Ukraine (this last one being a major factor).

The BoC has realised that this round of inflation is not “transitory” (despite what it stated last year) and is still moving up rather than down.  The best guess is that we’ll have to wait until 2024 for inflation to be in the BoC target of 2-3% annually.

I can’t afford another mortgage payment increase, what can I do?

Each person’s situation is different, and factors such as income, expenses, cash on hand (aka Rainy Day fund), budgeting and locking into a fixed rate all play a part.  There is no “Get Out of Jail Free” card for this issue.  It’s best if we discuss these matters individually so you can make an informed solution.  This is a time to lean on my knowledge and experience; please reach out to me.