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Interest rate changes and its impact on your mortgage
How do interest rate targets set by the Bank of Canada impact mortgage rates?
The Bank of Canada overnight rate, also known as the policy rate, affects Prime lending rates across all institutions. TD Mortgage Prime generally moves alongside the Bank of Canada overnight rate, which may in turn impact the interest rate for Variable Interest Rate Mortgage holders.
How do Bank of Canada rates work?
One of the aims of the Bank of Canada is to maintain inflation at a rate of 2% a year as this has been deemed the rate at which the economy is running near its capacity. So, when the economy is strong, the Bank of Canada may raise the overnight rate to lower inflation; when the economy is weak, it may lower the overnight rate to keep inflation from falling below the target rate of 2%.
How often can Bank of Canada interest rates change?
The Bank of Canada sets the overnight interest rate on eight fixed dates each year. The rate can go up or down, or stay the same at each of these dates. A change takes effect the day after it’s announced.
How do interest rate changes impact my variable interest rate mortgage?
The interest rate on a TD Variable Interest Rate Mortgage fluctuates with changes to the TD Mortgage Prime Rate. However, the amount of each payment stays the same.
If the TD Mortgage Prime Rate rises, then more of each payment will go towards paying the interest and a smaller portion will go towards paying the outstanding balance. This means your payments may increase if you change your payment schedule or at the time of renewal to get you back to your originally agreed upon repayment schedule (i.e., your amortization period).
While you’re not required to make changes as your interest rate increases, you do have options, including making a lump sum payment, increasing your payment amount or converting to a fixed rate mortgage1.
What is the Trigger Rate in a TD Variable Interest Rate Mortgage?
When interest rates increase and the payment doesn't change, the principal and interest amount may no longer cover the interest charged on a variable interest rate mortgage. When this occurs, it's called the Trigger Rate.
What is the Trigger Point in a TD Variable Interest Rate Mortgage?
After the Trigger Rate is reached on a TD Variable Interest Rate Mortgage, unpaid interest will start to increase the amount owing. At a certain point, you will be required to adjust your payments, make a prepayment, or convert to a fixed rate mortgage1.
How do interest rate changes impact my fixed interest rate mortgage?
For fixed interest rate mortgages, the interest rate will not change over the course of a mortgage term, regardless of TD Prime Rate or TD Mortgage Prime Rate fluctuations. As your interest rate is locked in, fixed rate mortgages offer the security of knowing your payments will not change over the term of your mortgage. However, you may see the impact of changes to rates when you renew.
Comparing TD variable and fixed interest rate mortgages
|
Variable rate |
Fixed rate |
|
|---|---|---|
|
Interest rate |
Can go up or down over the term of a mortgage loan. |
Locked in and will not change over the term of a mortgage loan. |
|
Payment amount |
Does not change over the term, but if the TD Mortgage Prime Rate rises then the portion going towards interest will go up. |
Does not change over the term, with each payment covering both interest and principal. |
|
Term length |
5 years. |
6 months, 1, 2, 3, 4, 5, 6, 7 or 10 years. |
What is the impact of interest rate changes on the housing market?
While there are many factors which impact the housing market, generally speaking, low interest rates can contribute to higher home prices2. The more homebuyers can afford, the greater the demand. So, when interest rates rise, this same logic applies – the housing market may cool as home buyers can afford less.
If you happen to be buying a home when interest rates are rising, then you may want to reconsider your purchasing budget to accommodate higher interest rates in the future.
What happens to my TD Home Equity FlexLine when there is an interest rate change?
On a Revolving Portion:
If you have a TD Home Equity FlexLine (HELOC) with an outstanding balance on your Revolving Portion, then the interest you pay on it will fluctuate with changes to the TD Prime Rate.
On a Variable Rate Term Portion:
With a Variable Rate Term Portion, your interest rate will also go up or down as the TD Prime Rate changes. However, the amount of your payment stays the same.
If the TD Prime Rate rises, then more of each payment will go towards paying the interest and a smaller portion will go towards paying the outstanding balance. This means your payments may increase if you change your payment schedule or at the time of renewal to get you back to your originally agreed upon repayment schedule (i.e., your amortization period).
How do interest rate changes impact my renewal?
When your term ends and if you are offered a renewal, then your offer will be based on the available interest rates at that time. The longer you have left in your term, the harder it is to predict where interest rates will be when your current term matures. When you’re closer to the end of your term, you can take a look at your options by talking with a TD Mortgage Advisor.
For customers renewing into a higher interest rate environment, you have options to consider to offset higher interest rates.
Prepayments:
- If you have an open mortgage, you can prepay as much as you like without incurring prepayment charges.
- If you have a closed mortgage, you can prepay up to 15% of your original principal amount without prepayment charges.
- Increasing your payment amount is another way to prepay your mortgage.
Accelerated payments:
- Moving from monthly to bi-weekly or an accelerated payment schedule (rapid payments) may help you save on interest.
