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Monthly Mortgage Update: February 2013

Bank of Canada Holds Overnight Rate at 1 Per Cent

The Bank of Canada (BoC) announced last month that it is yet again holding the overnight lending rate at 1.00 per cent. The overnight lending rate is the rate at which banks lend money to each other at, and most lenders set their prime rate based on it. If the BoC had announced an increase, instead, you could have expected to see your lender’s prime rate go up shortly thereafter. For example, a 0.25 per cent increase in the overnight lending rate would likely see banks match it with a 0.25 per cent increase in their prime rate.

The BoC decision’s to leave interest rates unchanged should come as no surprise; this is the 28th consecutive month it has remained at the historically low level. Although the Bank of Canada interest rate remains unchanged, it’s interesting to note the tone of Carney’s announcement. During the spring of 2012, Carney’s outlook of the economy seemed a lot rosier. He was predicting healthy economic growth of 2.4 per cent for 2012 and 2013 – these predictions have since been downgraded to a tepid 1.9 per cent for 2012 and 2.00 per cent for 2013. Inflation, a key factor monitored by the BoC and used in making interest rate decisions, remains at a lowly 1.5 per cent for 2012, well below the 2.00 target band level. If you’re a homeowner with a variable rate mortgage, the BoC’s decision to leave interest rates unchanged is great news – you can continue to pay down your mortgage at record low interest rates, potentially saving you thousands of dollars in interest.

When Will Interest Rates Go Up?

It’s not a question of if there will be a Bank of Canada interest rate hike – it’s a matter of when. Many economists were originally predicting an interest rate hike in the first half of 2013. Although those predictions look a lot less likely now, if you’re a homeowner it’s important to be prepared for the inevitable interest rate hike. While fixed rate mortgages aren’t directly influenced by increases to interest rates, you should still consider the possibility that rates will be higher when it comes time for you to renew. And higher interest rates could take a big bite out of your budget. For example, with a mortgage principal of $200,000, your monthly payment would be $946 on a fixed rate mortgage at 3.00%. However, if you renewed your mortgage at 5.00% in five years’ time, your monthly payment would increase by $217 to $1,163. You have to ask yourself, can I really afford an extra $217 a month? If an increase like that would put a strain on your budget, it’s worth taking advantage of your lender’s prepayment options now.

Other factors influencing the BoC’s decision to leave interest rates untouched include the looming U.S. debt ceiling and the European economic debt crisis. As things look now, it’s safe to say interest rates will remain low for at least the first half of 2013. With interest rates as low as they are and the housing market apparently cooling, there’s never been a better time to buy – especially if you’re a first-time homebuyer. Even if you no longer qualify for your dream home under the new mortgage rules, you could still look at lower priced housing alternatives like condos. No matter what you buy, at least you’ll be building equity in your property.

Also read:

Overnight Lending Rate in Canada