Bank of Canada keeps benchmark interest rate at 1.25%, now what?

March 12, 2018 | Posted by: Carlos Tovar

The Bank of Canada kept its key interest rate at 1.25%. However, the bank’s references to slowing household credit growth, firmer wages, and inflation running close to its two per cent target suggest hikes may be on the horizon.

The Bank of Canada’s overnight lending rate influences the interest rate at which financial institutions lend money to their clients.It climbed to its current level in January after reaching a record low of 0.25 per cent in April 2009, in reaction to the global recession in 2008.

Since January 2018 more clients are opting for a fixed rate mortgage over variable ate. This is mainly because Canadians are more concerned of rising interest rates and not being able to pay their mortgage. They also want to know the amount they have to pay in interest.

The Bank of Canada has been very cautios and will continue to weight the risk higher interest rate will pose to indebted Canadians. This will prevent the Bank of Canada from rising the interest rate too many times. 

As of today our 5 year closed variable rate is 2.21% and the 5 year closed fixed is 3.04%. The prime rate would have to increase three times in order for the rates to be very close to one another.

Here is an example to compare:

Purchase price $500000.00. Down payment 5%. Amortization 25 years. Interest rate 5 year closed variable at 2.21%. Monthly mortgage payment $2142.25. If the Bank of Canada increases the overnight rate by 50 basis points, the monthly mortgage payment would be $2264.95. The increase would be $122.70 monthly

Purchase price $500000.00. Down payment 5%. Amortization 25 years. Interest rate 5 year closed fixed at 3.04%. Monthly mortgage payment $2347.98. Canadians are still spending $205.73 a month more in mortgage payments when compared to the 5 year closed variable before the increase. After the increase by 50 basis points $83.03.

According to numbers the way to go is variable but fear makes people choose a fixed rate.

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