What Overnight Interest Rates Mean To Mortgage Holders
Often on the news, you will hear the announcement that the Bank of Canada raised, lowered, or held its overnight interest rate. Many people don’t pay much attention to these. However, monitoring the changes will protect your finances in the long term.
Does The Bank Of Canada Overnight Rate Affect Your Mortgage?
The answer to that question is yes and no. The Bank of Canada is the place Canadian banks go to for mortgage lending money that they, in turn, lend to Canadians.
The announcements of overnight interest rate changes mean your bank will look at the rates they are charged. The rate changes will impact how they divert them onto what you are paying on your home mortgage interest rates.
Most mortgages state prime plus a certain percentage in the contract for the money borrowed. Similarly, home equity credit lines taken on your home will also state credit line interest rates of prime plus rates.
Announcements of a .25% change do not seem significant. Still, if you look at that quarter percent change over a 25-year amortization, it can add or subtract thousands of dollars to the overall mortgage.
It can also mean an increase or decrease to your home mortgage payment of about $300. Most of the time, a rise in the overnight rate of .25%, means there will be several more quarter percent raises in the future.
Home mortgage types have a different impact on changes to the overnight rates. If you have a variable mortgage or open homeowner’s mortgage, your interest rate floats. It can also frequently change with rate changes. If you have a closed, fixed homeowner’s mortgage rate, the rate changes will not affect you as much. Which means you don’t need to worry until your mortgage renewal rate is up. If the interest rates have increased significantly, homeowners may have trouble qualifying unless they plan for unanticipated changes to their mortgage.
Protect Yourself From Mortgage Rate Increases
Here are some ways to protect your home and family should interest rates climb:
- Pay attention to Bank of Canada announcements
- Talk with your private mortgage broker or bank lender about options should rates increase
- Make a balanced budget that includes a buffer for rising expenses
- Create a savings plan
- Keep credit purchases low and pay them off each month
- Re-evaluate your spending habits and find ways to increase income
- Lock into a fixed mortgage should interest rates jump significantly
The Bank of Canada reviews interest rates eight times a year. If there is a rate change each time, that could mean a change of two percent each year. A two percent increase will have a significant impact on your mortgage payments. With each review, the Bank of Canada Board issues statements to keep Canadians informed. This allows them to watch trends develop over the year.
How The Bank Of Canada Sets Overnight Rates
Most of us don’t know much about the process the Bank of Canada uses to decide how much rates change. It is run by an independent board of directors appointed by the Minister of Finance. There is a Governor, a Senior Deputy Governor and 12 directors on the board.
The goal of the board is to promote the financial and economic welfare of Canadians. The Bank Of Canada makes all decisions by monitoring the international and Canadian markets. Additionally, they watch the monetary transfers that occur in the world daily. They consider the productivity of Canadians and job employment rates, the cost of living index, and Canadians debt load figures.
The exchange rates of the Canadian dollar compared to other countries are also monitored. Canada’s primary trading partner is the United States. Therefore, the value of money is often linked with their bank rates and money value. There may also be changes in the future when global trading partners from Europe and Asia increase.
The statement released with the announcement of an overnight change reflects the directors’ perspective on Canadian finances.
“Economic forecasts have been marked down further in most countries, largely as a consequence of the escalation of trade actions and uncertainty around what may be next,” said Bank of Canada Governor Stephen Poloz in his Oct. 30, 2019 rate announcement.
In that announcement, the rate stayed the same at 1.75%.
If you want to know more about how interest rates affect mortgages, give us a call. Our team of professional mortgage brokers at The Mortgage Group Calgary can help. We will explain in a way you can understand how to get the best interest rates for your home mortgage and home equity credit line.