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Last Wednesday, the Bank of Canada raised its overnight rate by 50 basis points to 3.75%, from 3.25% in September.
It was the sixth time this year that the bank has tightened the money supply to stifle inflation, so far with limited results.
Even though the increase was slightly less than expected, 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 a fixed rate mortgage who are facing a renewal shortly will see much higher rates if they have a five year fixed term mortgage renewal.
Some of you may have received recommendations from your mortgage broker in the past couple of years to take out an adjustable rate mortgage. This recommendation was based not only on historical data, but also on the outlook of the Bank of Canada itself.
This is what Tiff Macklem, the Governor of the Bank of Canada had to say in October 2020: “What we are saying is that we are going to get through this, but it is going to be a long job. We are telling Canadians, and our forecast has been very clear, that we will keep our policy interest rate at the effective lower limit until the unused margins are absorbed so that we can sustainably achieve our inflation target of 2%, and we’ve indicated that won’t happen until 2023. What does that mean? Yes, this means that if you are a household planning to make a big purchase, if you are a business planning to invest, you can be sure that interest rates will be low for a long time.
There was no way for anyone to predict the current direction of the Bank of Canada.
So what action, if any, should you take in the future? You may be wondering if you should now lock in your variable rate mortgage. There is a lot of chatter in the media about the rate going up again in December and again next year.
The first question you should ask yourself is why you chose an adjustable rate mortgage in the first place. Was it because it had a lower rate than a fixed term mortgage or did you have a plan to take advantage of that lower interest rate?
Historically, a variable rate has been a better option by simply comparing rates, but those rates can change. Potentially, and depending on whether you have a variable rate mortgage or an adjustable rate mortgage, more of your payment will go to interest rather than principal if your payment is not adjusted accordingly as the rates increase.
Another important consideration with adjustable rate mortgages is that they generally have lower prepayment penalties than a fixed rate mortgage if you decide to terminate your mortgage early. Statistics confirm that this happens more often than not.
Consumers should assess their personal balance sheet and risk tolerance. The decision to go short (floating) or long (fixed) will depend on consumers’ risk tolerance as well as their ability to afford increased mortgage payments.
You need a plan with an adjustable rate mortgage. The best thing to do is to review with a mortgage broker to determine your personal tolerance for rate increases and determine a strategy for managing your mortgage to lower your overall cost of borrowing.
One thing to consider about locking in your mortgage is that not all lenders will offer you the best fixed rates. You are also hedging your bet that at some point your fixed rate will be lower than on a variable rate mortgage.
Perhaps switching to a fixed payment variable could be an option rather than locking yourself into a fixed term mortgage. The best decision is based on your risk tolerance.
No one can predict where the rates are going – even the experts were wrong! Your decision to lock in a fixed rate mortgage shouldn’t be based on what you read in the media.
If you would like a no obligation review and financial analysis of your personal situation, please let me know. We can compare your current variable rate mortgage to a fixed term option and even compare it to a variable rate mortgage with fixed payments. This way, you can make an informed decision about whether locking is the best option for you.
I will do my best to ensure you make the best decision based on today. Please set aside an hour here on my calendar to chat at www.calendly.com/april-dunn and I’ll do my best to help.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.
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