Bank of Canada raises interest rates

[Mike Oxlong]

As expected the Bank of Canada raised the key overnight rate today. However the increase was minimal at only .25%. There was specualtion that they could have raised it by .5%.

Minimal increase but we all knew it was coming. Look for further increases throughout the rest of the year. The next announcement is July 20.

What this increase means is that for those of you in a variable rate mortgage your payments are about to go up slightly.

http://www.calgaryherald.com/busines...928/story.html

[Azure]

Good.

[mykalberta]

According to CBCNW Canada GDP growth is/was at 6% so this shouldnt be a surprise.

[MacDaddy77]

Originally Posted by Mike Oxlong

As expected the Bank of Canada raised the key overnight rate today. However the increase was minimal at only .25%. There was specualtion that they could have raised it by .5%.

Minimal increase but we all knew it was coming. Look for further increases throughout the rest of the year. The next announcement is July 20.

What this increase means is that for those of you in a variable rate mortgage your payments are about to go up slightly.

http://www.calgaryherald.com/busines...928/story.html

Unless I misunderstand things with variable mortgages... Your payments stay the same but the ratio of Principal vs Interest changes?

[Slava]

Originally Posted by mykalberta

According to CBCNW Canada GDP growth is/was at 6% so this shouldnt be a surprise.

That 6% figure is pretty misleading though. We had the Olympics which had an impact as well as a signifcant increase in the price of oil. I think that the BoC had a difficult decision to make here actually and there is no guarantee rates go up again in July.

[Mike Oxlong]

Originally Posted by MacDaddy77

Unless I misunderstand things with variable mortgages... Your payments stay the same but the ratio of Principal vs Interest changes?

It varies depending on the lender. Your payments on Variable rate mortgages at most lenders will float up or down based on the interest rate. There are a couple lenders that will keep your payment the same and change the ratio of Principal vs. Interest.

RBC is one lender that keep your payments the same and changes the ratios. This is great when your get into a variable rate when rates are high and they drop throughout your term as you pay off the principal quicker. However you need to be careful that if you get in when the variable rate is low and it increases without your payments increasing they will charge you for missed payments at the end of your term. It can be a very unpleasant surprise.

[MoneyGuy]

Expect a string of rate increases. The BofC hasn't raised rates for a long time and wouldn't have done it now as a one-time increase. They'd only raise rates as the first of several increases.

[Sylvanfan]

Originally Posted by MacDaddy77

Unless I misunderstand things with variable mortgages... Your payments stay the same but the ratio of Principal vs Interest changes?

When I had variable rate mortgages I always had my payment set about 2 percentage points higher than what the actual rate was. So when the rates did get raised my payment stayed the same but the amount that was principal vs. interest was the only thing affected.

If someone had their payment set at the minimum rate, than those people probably need to increase their payment to cover the increase in the interest.

[Bobblehead]

Originally Posted by Slava

That 6% figure is pretty misleading though. We had the Olympics which had an impact as well as a signifcant increase in the price of oil. I think that the BoC had a difficult decision to make here actually and there is no guarantee rates go up again in July.

Additionally upping the interest rate will act to increase the value of the Canadian dollar. The BoC doesn't want to raise the value too much or too fast since that harms the export sector.

But then US construction just reported that April was the largest increase in 10 years, so that probably gave the BoC an opportunity to bump the rate a bit.

[Russic]

I have a very stupid question and I welcome you to laugh at me. The interest rate ... is that working off your monthly mortgage payment? So if your mortgage is $1000/month and your interest rate is 3%, are you paying $1030? Is it that simple or are there other factors in play?

[The Yen Man]

It works off your yearly rate I believe. So if it's 3%, and you borrowed $100,000, then it's $3,000 per year, split into 12 months.

[Sylvanfan]

Originally Posted by Russic

I have a very stupid question and I welcome you to laugh at me. The interest rate ... is that working off your monthly mortgage payment? So if your mortgage is $1000/month and your interest rate is 3%, are you paying $1030? Is it that simple or are there other factors in play?

There are a lot of other factors. Interest on a mortgage is compounded over the term of the loan. Than the loan is paid back in reverse if you will. On a $250,000 loan the interest ends up being more than what the initial principal was.

For example on a 250,000 mortgage amortized over 25 years and a 5% interest rate on a 5 year term, you monthly payment is $1454 a month. In those first 5 years just over 28,000 of your pament is on principal and 59,000 or so is interest. Towards the end of the mortgage, it's the opposite where most of your payment is going towards principal.

So depending where you are with your mortgage the amount of interest you need to pay and how it affects your payment will be different.

[onetwo_threefour]

Originally Posted by The Yen Man

It works off your yearly rate I believe. So if it's 3%, and you borrowed $100,000, then it's $3,000 per year, split into 12 months.

Only if it's simple interest. In most cases your mortgage will be compunded at a minimum of semi-annually and sometimes as much as daily. In that case the interest is recalculated on the principal and accrued interest for whatever period it is compunded. That's why you need amortization tables to figure out payments, because the calculation is more complicated than taking yearly interest and dividing by the number of payments per year.

[Tron_fdc]

I'm ok with this. Make hay while the sun shines, I guess.

As long as we don't start bankrupting the average homeowner, and it doesn't inflate our currency too much to affect those poor souls in the export sector (me being one of them) I'm all for it.

[Rutuu]

Originally Posted by Russic

I have a very stupid question and I welcome you to laugh at me. The interest rate ... is that working off your monthly mortgage payment? So if your mortgage is $1000/month and your interest rate is 3%, are you paying $1030? Is it that simple or are there other factors in play?

More complicated...

Factors that play:
1. Principle borrowed
2. Interest Rate (variable or fixed and whether variable alters your priciple/interest payment ratio or if it changes your monthly payment)
3. Amortization period (do you make montly or semi monthly payments)

Ex:
1. Principle borrowed = $300,000
2. Interest Rate = 5% (fixed)
3. Amortization Period = 30yrs on montly payments (30*12 = 360payment periods)

Payments = $1610.46/mo
(1st payment is $1250 interest/$360.46 principle);
(2nd payment is $1248.50 interest/$360.26 principle)
(360th payment will be $0/$1610.46 principle)

Total Principle Repaid after 360 periods = $300,000
For the interest I'd have to throw it in a spreadsheet/same for the two forms of variable rate.

[Azure]

Originally Posted by Slava

That 6% figure is pretty misleading though. We had the Olympics which had an impact as well as a signifcant increase in the price of oil. I think that the BoC had a difficult decision to make here actually and there is no guarantee rates go up again in July.

Canada is dependent on a stable oil price though.

[Russic]

Wow good info folks ... thanks.

[Azure]

Originally Posted by Tron_fdc

I'm ok with this. Make hay while the sun shines, I guess.

As long as we don't start bankrupting the average homeowner, and it doesn't inflate our currency too much to affect those poor souls in the export sector (me being one of them) I'm all for it.

First sign of economic stability means we need to tighten our monetary policies.

Bank of Canada needs to get back to 2005 levels where our economic output was at its peak. Lowering rates was good to get through the recession, but I think we're past that now.

[normtwofinger]

Originally Posted by Rutuu

More complicated...

Factors that play:
1. Principle borrowed
2. Interest Rate (variable or fixed and whether variable alters your priciple/interest payment ratio or if it changes your monthly payment)
3. Amortization period (do you make montly or semi monthly payments)

Ex:
1. Principle borrowed = $300,000
2. Interest Rate = 5% (fixed)
3. Amortization Period = 30yrs on montly payments (30*12 = 360payment periods)

Payments = $1610.46/mo
(1st payment is $1250 interest/$360.46 principle);
(2nd payment is $1248.50 interest/$360.26 principle)
(360th payment will be $0/$1610.46 principle)

Total Principle Repaid after 360 periods = $300,000
For the interest I'd have to throw it in a spreadsheet/same for the two forms of variable rate.

You have too much time on your hands. Go outside.

[HPLovecraft]

I'm never going to be able to pay back my $1.5M loan.