The Bank of Canada’s overnight rate increase may leave you wondering if you will be impacted. There are options available now to help you make the right financial decisions for yourself, and your family in a rising rate environment.
If you are an active user of variable-rate loans and credit products, such as variable-rate mortgages and lines of credit there will be an impact. We recently responded to this increase by increasing the CIBC Prime Rate. The interest rate for floating-rate loan products such as variable-rate mortgages and lines of credit is based on CIBC Prime Rate.
An increase in your interest rate means that a greater portion of your regular payments goes towards interest and less goes towards your mortgage principal. This extends the amortization period, which means your mortgage will be paid off at a later date than originally scheduled. However, once your mortgage renews, your payments will adjust and the original amortization schedule will be restored.
If you’d like to avoid extending the amortization over your current term, here are a few options to consider in advance of the maturity date:
Increase your mortgage payment now to maintain your original amortization schedule
Make a principal prepayment. To avoid paying a prepayment charge, these payments can be made as part of your annual prepayment privilege — subject to remaining payment amounts, or you can set funds aside to make this prepayment at the time of the mortgage renewal
As CIBC Prime increases, you may find your mortgage payment is no longer enough to cover the interest that accrued during the payment period. The interest rate at which this happens is called the “trigger rate”. At this point, we may require you to increase your regular mortgage payment amount. If we do not, you may keep the same payment amount, but accrued interest will continue to be added to the principal, and the amortization period of your mortgage will increase as a result.
Eventually the principal amount may reach the Designated Amount set out in your mortgage documents. Once this occurs, CIBC will require that you make a lump sum payment to bring your principal below the Designated Amount, increase your payment and or convert to a fixed rate mortgage.
If no action is taken, CIBC will increase your payment amount so that the mortgage will be repaid over the remaining time in the original amortization period.
Convert your CIBC variable-rate term to a fixed-rate closed mortgage
Want to lock in to a fixed interest rate? With your CIBC Flex Variable-Rate Mortgage, you can convert your mortgage with no prepayment charge, to a term of 3 years or more with a fixed-rate closed mortgage.
One of the benefits of the fixed-rate closed mortgage is that CIBC Prime Rate increases have no impact on your interest rate. Therefore, your principal and interest payments remain the same as well as the mortgage amortization period.
Lines of credit
As of today, the increase in CIBC Prime Rate results in an immediate increase in your monthly interest payments.
Here are 3 strategies to consider to minimize this impact on your day-to-day finances:
Look to pay down your highest interest rate debts first to minimize compounding interest. If your debts have interest that accrues and are added onto the loan balance, this compounding interest effect can make it difficult to get ahead. An increase in interest rates will further exacerbate this effect and increase the time it will take to pay off your loan. Once these debts are paid off, this will allow you to redirect your funds faster to other goals.
If your line of credit is included in your CIBC Home Power Plan®, you can move your line of credit balance into your mortgage. As mortgages generally have lower interest rates than lines of credit, this gives you an opportunity to lock in these balances under a fixed rate that is also lower than what you may be paying today on your line of credit.
If your line of credit is not included in your CIBC Home Power Plan, you may be able to refinance your mortgage to pay down your line of credit debt.
With many financial industry experts predicting that the Bank of Canada will continue to raise interest rates this year, you may have concerns about what this means for you and need advice on how to make informed decisions. We welcome having a conversation with you about your unique situation and discussing the best path forward for you and your family.