Last Wednesday, the Bank of Canada raised its overnight benchmark interest rate by 50 basis points to 3.75% from 3.25% in September.
That was the sixth time this year the bank has tightened the money supply to quell inflation, so far with limited results.
Even though the increase was a bit smaller than predicted, the increase is still causing a lot of pain and worry, especially if you currently have a variable rate or adjustable rate mortgage.
Even those with a fixed-rate mortgage facing renewal soon will be looking for 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 recent years to take out an adjustable rate mortgage. This recommendation was based not only on historical data, but also on the Bank of Canada’s own perspective.
Here’s what Tiff Macklem, the Governor of the Bank of Canada, said in October 2020: “What we’re saying is we’re going to get through this, but it’s going to be a long way. We are telling Canadians, and our forward guidance has been very clear, that we will keep our policy rate at the effective lower bound until the slack is absorbed so that we can sustainably achieve our 2% inflation target. , and we’ve indicated that that won’t happen until sometime in 2023. What does that mean? Yes, that means if you’re a household looking to make a big purchase, if you’re a business looking to invest, you can be sure interest rates will be low for a long time.”
No one could have predicted the current direction the Bank of Canada would take.
So what action, if any, should you take going forward? You may be wondering if you should now insure your adjustable rate mortgage. There is a lot of talk in the media about raising the rate again in December and again over the next year.
The first question to ask yourself is why you chose an adjustable rate mortgage in the first place. Was it because you 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 simply by 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 doesn’t adjust accordingly as rates rise.
Another important consideration with variable rate mortgages is that they have lower prepayment penalties than a fixed rate mortgage should you decide to break your mortgage early. Statistics support that this happens most of the time.
Consumers should assess their personal balance sheets and tolerance for risk. The decision to go short (variable) or long (fixed) will depend on consumers’ risk tolerance, as well as their ability to withstand increases in mortgage payments.
You need a plan with an adjustable rate mortgage. It’s best to check 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 insuring your mortgage is that not all lenders will offer you the best fixed rates. You’re also hedging your bet that at some point your fixed rate will be lower than an adjustable-rate mortgage.
Perhaps switching to a fixed-payment variable could be an option instead of sticking with a fixed-term mortgage. The best decision is based on your risk tolerance.
No one can predict where rates are headed, even the experts got it wrong! Your decision to commit to a fixed rate mortgage should not be based on what you read in the media.
If you would like a no-obligation review and financial analysis for your personal situation, please let me know. We can compare your current adjustable rate mortgage to a fixed term option and even compare it to a variable rate mortgage with fixed payments. That way, you can make an informed decision about whether going into lockdown is the best option for you.
I will do my best to make sure you make the best decision based on today. Set aside a time 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 a contract columnist and does not necessarily reflect Castanet’s views.
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