Bank of Canada Rate Accouncements and Your Mortgage

Ten times a year the Bank of Canada makes an announcement regarding the target interest rate and prime rate but what does this mean?

Target Interest Rate

The target interest rate or policy interest rate is the rate with which major financial insitutions borrow and lend money to each other, it is NOT the rate offered to consumers. The Bank of Canada adjusts this rate depending on inflation, economic stability, and unemployment rates. When the target policy rate changes the Bank of Canada prime rate also changes. Most of the time, when the Bank of Canada makes a rate adjustment it will only move by .25% however this change has a trickle-down effect that could impact your mortgage.

Impact on Variable Rate Mortgages

Because variable/adjustable rate mortgages are based on the prime rate, with every Bank of Canada adjustment, anyone with a variable rate mortgage will see their interest rate change. If the Bank of Canada decides to raise the policy interest rate by .25%, those with a variable mortgage would see their interest rate increase by .25%. If on the otherhand the Bank of Canada decides to lower the rate by .25%, those with a variable mortgage would see their interest rate decrease by .25%.

This potential change in interest rate 10 times a year is why a variable rate mortgage is often considered to be a higher-risk mortgage.

Impact on Fixed-Rate Mortgages

If you have a fixed rate mortgage you will not experience the difficulties (or benefits) associated with the Bank of Canada rate change. A fixed rate mortgage locks in an interest rate for a set period of time and will not experience the fluctuations experienced with a variable rate mortgage. This stability is why fixed rate mortgages are often seen as a less risky option as they are steady and predictable.

Rate Increases

When there are multiple Bank of Canada rate increases over a short period of time many of our mortgage clients will choose to lock in their variable rate mortgage. With a variable rate mortgage you can choose to switch to a fixed rate mortgage at any time throughout your mortgage term. When locking in, you will lock into whatever the current fixed rate mortgage rates are. Once a mortgage is locked in, it cannot be converted back into a variable rate mortgage without breaking the mortgage.

How to Manage Bank of Canada Rate Changes

Grande Prairie Mortgage Broker Team, Gert Martens Mortgage Team is here to help you every step of the way! If you are choosing a new mortgage and don't know if a fixed or variable rate option makes more sense for you, our mortgage team talks you through the pros and cons so you can make a choice that makes sense for you.

Have questions about mortgage rates including how to get the best mortgage rate in Alberta? Reach out to our team today!