The Bank of Canada’s policy interest rate has changed; how does this affect my variable rate mortgage?

Whenever the Bank of Canada changes its policy rate, it is important to understand that mortgage lenders do not automatically change their prime rate. In fact, a bank’s prime rate may not even change at all or might not reflect the Bank of Canada’s policy rate increase or decrease. In real terms, a Bank of Canada lending rate decrease of 0.75 per cent may translate into a prime rate decrease of only 0.25 per cent at chartered banks and other mortgage lenders.

But why is this?

Mortgage lenders are not required to adjust their prime rate in accordance with the Bank of Canada’s policy interest rate. Consequently, mortgage lenders establish their prime rate in accordance with the costs and performance of their funds.

While some mortgage lenders will change their prime rate, be aware that some of them will immediately apply the adjustment on your mortgage loan, while others will only do it on the 1^st business day of the following month.

Here are a few examples of lenders that apply the change immediately:

Desjardins, Scotia Bank, B2B, TD Bank, Merix/Lendwise, Home Trust, National Bank

Here are a few examples of lenders who apply the change on the 1^stday of the following month:

First National, MCAP, Manulife, CIBC

So, what happens with the payment amount?

Again, this depends on your lender – some lenders will adjust the payment amount the following month, while others will keep a fixed amount, and others allow their customers to choose between a fixed amount or a variable amount.

Here are a few examples of lenders that adjust the payment amount each time a change occurs:

First National, MCAP, Scotia Bank, Merix/Lendwise, Home Trust, National Bank

Here are a few examples of lenders that do not adjust the payment amount, but rather increase or decrease the portion of the payment allocated to the principal based on the interest rate increase or decrease:

Desjardins, TD Bank, Manulife, CIBC

All these adjustments consider the amortization at the beginning of the loan, because its duration cannot be exceeded. If the amount of your payment becomes too low to meet the amortization period, the bank will adjust the amount of your payment upwards.

You have a variable rate and have questions that come to mind? Don’t hesitate to contact your broker to discuss this further.

TERMS	BANKS	MORTGAGE PLANNERS
6 months Fixed	7.85%	7.50%
1 Year Fixed	7.74%	5.84%
2 Years Fixed	7.34%	5.54%
3 Years Fixed	6.94%	4.34%
3 year closed Variable	7.35%	5.95%
4 Years Fixed	6.74%	4.29%
5 Years Fixed	6.79%	4.24%
5 years Variable	6.45%	4.90%
Refinance Fixed or variable	9.15%	4.34%
7 Years Fixed	7.10%	4.44%
10 Years Fixed	7.25%	5.09%
HELOC	6.95%	6.45%

TERMS

BANKS

MORTGAGE PLANNERS

6 months Fixed

7.85%

7.50%

1 Year Fixed

7.74%

5.84%

2 Years Fixed

7.34%

5.54%