Today, there is much uncertainty in the world given our current situation; nearing the end of a pandemic (fingers crossed), the war in Ukraine, rising interest rates, rising inflation, gas prices, groceries, electricity, and rent following suit. All these things affect us daily; however, one question I’m often asked remains the same ‘Should I lock in my variable rate?’
As of June 13, 2022, one month before the Bank of Canada’s (BOC) next scheduled announcement, there is much speculation as to what the BOC will do. Since the is so much daily movement, we are addressing this question more frequently than ever.
A quick search on google will leave you with more questions as there is no clear consensus on what the BOC will do next, but there are many clues in their wording if you just know what you are looking for.
Here is what we know:
Early in the year, the BOC stated that its objective was to get the policy rate back to neutral, between 2-3%.
Currently, the overnight rate is sitting at 1.5%; remember, we started 2022 with an overnight rate of .25%.
In the last Financial System Review https://www.bankofcanada.ca/2022/06/financial-system-review-2022/ (FSR), the BOC once again made the following comments ‘We may need to take more interest rate steps to get inflation back to target,’ which is in keeping their promise of being prepared to act ‘more forcefully.’
Many say since the BOC was slow to start the rate increase cycle, it will have to increase rates ‘fast and furious’ to stabilize the economy. This comment falls in line with BoC Governor Macklem’s warning that the BOC may need to temporarily take its policy rate past its neutral-rate range of 2% to 3% to slow down inflation pressures and may also ‘need to move more quickly’ by resorting to hikes of more than 0.50%.
Based on Governor Macklem’s comments, many experts are anticipating a .75% rate increase in July, taking us closer to the 3% natural target overnight rate.
Remember that a series of additional hikes was already expected, and more significant hikes would only reduce the total number of increases over time.
The good news; many of today’s home buyers have zero debt – something positive that isn’t getting much airtime.
When your variable rate increases, it’s hard to remember that your income has most likely also increased yearly, so the rate increase should not impact you as forcefully as you think.
The rate increases may feel like whiplash since they have come far quicker than anyone anticipated. I’m of the option that there is a substantial spread between current fixed and variable rates, and if I had to choose, I would take a variable rate mortgage along with a well-thought-out action plan.
If you’ve read this far, you are most likely looking for advice on locking in or staying variable and so let’s look at some numbers and make some assumptions.
If you are currently in a variable rate mortgage currently, then it’s likely that your rate is prime -.95% or better, so you have a good deal of buffer in that rate.
If you lock in your prime -.95% (currently 2.75%), you would be locking in around 4-5% range. Personally, that’s like throwing away money; in my opinion, instead, I suggest you voluntarily increase your payments by about 25% or set aside 25% into a savings account. Now you’ve either paid your mortgage off faster by increasing your payment or started building a habit of a higher mortgage payment so that you are not in payment shock when you exit this still extremely low rate.
Fact: we are heading into more increases.
Fact: you do the above, and you will sail smoothly by
Assumption: The BOC will likely over-tighten and need to ease up and lower variable rates before your 5-year term is up
Fact: Now is not the time to lock into a five-year fixed rate if you have a variable rate.
If you are looking for a new mortgage and are set on a fixed rate, then let’s look at a two or three-year rate as an option, as this will likely take us through the higher rates we are currently experiencing and out on the other end.
If you are looking for a variable rate mortgage, let’s look at all the numbers, make some assumptions and see if this is the right plan for you.
It may be evident that I think variable rates are a better option, even as it stands, but they are not for everyone. There was a time in my life that I needed to know what the fixed payment was, and that was that.
So I will end this post by stating that there are no perfect one-size-fits. You must take the product and option you are most comfortable with.
It’s your life, and no one else is making money or spending it for you (unless you have kids, lol).
Remember this ….the plan is as important as the product.
More than ever, this is the time that you need a Mortgage Broker to work with.
Anyone can take an order ‘I’d like a 5-year fixed, please,’ but not everyone is prepared or equipped to have an educated conversation about why!
If you want advice on your mortgage or want to discuss options, connect with me.