Bank of Canada raised the target for their overnight rate.

Today, the Bank of Canada raised the target for their overnight rate. This means that interest payments on products like variable rate mortgages and lines of credit could now be higher than they were last month.

What is a variable rate with Cap Rate Protection?

A variable rate mortgage with Cap Rate Protection has fixed payments for the term of the mortgage that are calculated based on a cap rate rather than the current variable rate; as rates rise more of your payments would go towards interest, and less to the principal (but your monthly payment remains the same). 

• If you’re looking to purchase a home, you may want to start the mortgage pre-approval process before the expected interest rate hikes. A pre-approval is when a mortgage lender looks at your finances to determine the maximum amount they will lend you and at what interest rate. Typically, the pre-approval is valid from 60 to 120 days, which means the interest rate is guaranteed for this period. 

What are the key differences between variable and fixed rate mortgages?

Generally speaking, fixed rate mortgages are ideal for people who want the security of knowing that their payments will remain the same over the term of the mortgage. When interest rates are expected to rise, fixed rates will be attractive to avoid financial impact.

Variable rate mortgages hold appeal as the initial interest rate is generally lower than a fixed rate, and there is the potential to pay less interest over the term of your mortgage if the Bank of Canada has little to modest rate hikes; however, there is no easy way to predict this with 100% accuracy, which is why variable rates have interest rate risk.

However, it has been found that in the long run, variable rate mortgages tend to do better than a fixed rate mortgage.