By now most people have heard that the Bank of Canada has increased the benchmark interest rate by 0.25% up to 0.50%. You’ve no doubt seen the headlines “Bank of Canada Doubles Interest Rate” or some variation that makes you think the sky is falling. Despite all that, let’s break down exactly what this change means, and you’ll see, it’s not quite as scary as you’re being led to believe.

First, let’s talk about a variable rate mortgage, essentially it means that you are given a rate that is tied to a lenders prime rate. For the last two years, prime has been 2.45%. So you may have been quoted or given a rate of prime minus 1.0%, which means your current interest rate is 1.45%.

Now that we understand what a variable rate mortgage is, here’s what it means in practical terms. The Bank of Canada has increased the benchmark rate up by .25%, meaning that prime will follow, so that 2.45% will now become 2.70% and your current interest rate would become 1.70%. Which sounds like a lot, but if we follow the math on it, it simply means that for every $100,000 you’ve borrowed, your payment will increase by $12.00. So if you have a $500,000 balance on your mortgage, that’s an extra $60.00 per month you’ll pay. Not quite as scary as it seems right?

So what about fixed rate mortgages, well, they are unaffected by the changes made by the Bank of Canada. The rate that someone has fixed will stay the same for the entire length of their term. Of course for that stability, a lender will charge a higher interest rate. Right now, fixed rates are roughly around 3.14%. So about 1.35% higher than a variable rate.

So with that in mind, let’s look at a real world example and compare the two:

Variable Rate – Prime (2.70%) – 1% = 1.70% interest rate
$500,000 Mortgage Balance
$2,047.01 Payment

Fixed Rate – 3.14% interest rate
$500,000 Mortgage Balance
$2,402.29 Payment

So a variable rate right now will save you $355.28 per month. Which over the course of a 5 year term is $21,316.80. Of course as variable rates increase, that savings will decrease. We are currently about 6 more rate increases away from that point. So in the meantime, a variable offers you lower monthly payments, and a penalty of 3 months interest if you happen to break your mortgage term vs the higher monthly payments, and a penalty called interest rate differential which can cost you into the 10’s of thousands of dollars for breaking your mortgage mid-term.

The Bank of Canada makes 8 announcements a year, which is when they either increase, decrease, or leave the interest rates where they are at. We’ve already had 2 of them this year, and the next is scheduled for April 13th.

It’s always a good idea to review your mortgage when you see things like interest rate increases, but don’t panic when you do. There are still lots of benefits to being in a variable rate mortgage, and there will continue to be for the foreseeable future.