Last Wednesday, the Bank of Canada raised its overnight benchmark rate by 50 basis points to 3.75% from 3.25% in September.
This was the sixth time this year that the bank has tightened the money supply to curb inflation, with little success so far.
Although the increase was slightly less than predicted, the increase still causes a lot of pain and worry, especially if they are currently on a variable rate or adjustable rate mortgage.
Even those with fixed rate mortgages who are due to renew soon will be looking at much higher rates if they have a five-year term mortgage renewal.
Some of you may have received recommendations from your mortgage broker to take out an adjustable rate mortgage. This recommendation was based not only on historical data but also on the views of the Bank of Canada.
Here’s what Bank of Canada Governor Tiff Macklem had to say in October 2020: “We’re saying we’re going to get through this, but it’s going to be a long rant. We’re telling Canadians, and our forward guidance has been very clear, that we’re going to keep our policy rate at the effective lower bound until the slack dies down, so that we can sustainably reach our 2% inflation target, and we’ve announced that that won’t happen until sometime in 2023. What does that mean? Yes, it means that if you’re a household thinking about making a big purchase, if you’re a business thinking about investing, you can count on that interest rates will remain low for a long time.”
No one could have predicted the Bank of Canada’s current direction.
So what steps should you take going forward? You may be wondering if you should lock in your variable rate mortgage now. There is a lot of talk in the media about the interest rate increase in December and again next year.
The first question you should ask yourself is why you chose an adjustable rate mortgage. Was it because it had a lower rate than a term mortgage or did you have a plan to take advantage of that lower rate?
Historically, variable interest has been a better option just by comparing interest rates, but they can change. Potentially, and depending on whether you have a variable rate mortgage or an adjustable rate mortgage, a larger portion of your payment will go towards interest rather than principal if your payment is not adjusted accordingly as interest rates rise.
Another important aspect of variable rate mortgages is that they tend to have lower prepayment penalties than fixed rate mortgages if you decide to pay off your mortgage early. Statistics support that this happens more often than not.
Consumers should assess their own balance sheet and risk tolerance. The decision to go short (variable) or long (fixed) depends on consumers’ risk tolerance and their ability to withstand rising mortgage payments.
You need a plan with a variable rate mortgage. It’s best to check with a mortgage broker to determine your personal tolerance for interest rate increases and to determine a strategy for managing your mortgage to reduce overall loan costs.
When locking in a mortgage, you need to take into account that not all lenders will offer you the best fixed rate. You also hedge your bet that at some point the fixed rate will be lower than the variable rate mortgage.
Changing from a fixed payment to a variable one might be an option instead of locking in a fixed-term mortgage. The best decision is based on your risk tolerance.
No one can predict where prices are going – even the experts got it wrong! Your decision to lock in a fixed rate mortgage shouldn’t be based on what you’ve read in the media.
If you would like a no-cost review and financial analysis of your personal situation, please let me know. We can compare your current adjustable rate mortgage with a term option and even compare it to a variable rate fixed payment. This way you can make an informed decision about whether locking is the best option for you.
I will do my best to make sure you make the best decision based on today. Make an appointment here on my calendar for a chat at www.calendly.com/april-dunn and I will help as best I can.
This article was written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.
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