Here are some important points to know about prime and your variable rate mortgage.
Fixed rate mortgage holders are not affected by changes in prime. Bank of Canada rate changes only affect those with a variable rate mortgage.
On July 12th and September 7th, lenders raised their variable rate mortgages. They increased them by 0.25% each time, matching the Bank of Canada rate change.
There are two more Bank of Canada meetings left in 2017 and there are doubts of any further rate increases more than 0.25%.
The increase in July was the first increase in prime in the last seven years. In 2015, there were two prime reductions.
For every $100,000 in mortgage balance, a 0.25% increase in rates equals a payment increase of approximately $13.
When your variable rate changes, this will affect either your amortization or your payment amount. Not all lenders change your payment amount when your variable rate changes. In those cases your amortization will increase or decrease as rates go up or down.
You can convert your variable rate mortgage to a fixed rate with no cost. The length of fixed term you can convert to will be different from lender to lender.
If you convert to a fixed rate and need to break your mortgage, the penalty to do so can increase considerably. Variable rates typically have a penalty of 3 months of interest where fixed rates will have a penalty of the larger of 3 months of interest or the interest rate differential.
In 2015 when the Bank of Canada lowered their overnight rate by 0.25%, lenders only reduced their rates by 0.15% however with the last two increases they have raised their rates by the full 0.25% each time.
Future rate increases will be largely driven by a strengthening economy in Canada.