Interest Rates on the Rise Again... What Should I Do?

StatsCanada reported an alarming 6.7% inflation spike in March, a full percent higher than what was already a record-breaking 5.7% reading in February. In hopes that inflation can return back to the 2% target, the BoC (Bank of Canada) is going to continue quantitative tightening. This means maturing government bonds will no longer be replaced, which will result in reducing the supply of money, and therefore, increasing interest rates. The expectation for the BoC’s decision during their meeting on June 1st is at least another 0.50% increase in the overnight rate.

Fixed Rates Predictions

On April 21st, 5-year bond yields rose to 2.80% and 10-year yields shot up to 2.88%. The 5-year yields, which are crucial for setting the 5-year fixed mortgage rates, have nearly quadrupled over the past year! However, economists are expecting fixed rates to come down in late 2022 or early 2023, as they are predicting bond yields to come down.

Variable Rates Predictions

The current BoC Prime rate is 3.2%. For those who just got a variable mortgage, or are still shopping for a mortgage, Prime - 0.5% is likely what you will see for an owner-occupied interest rate. This means your rate would be 3.2% - 0.5% = 2.7%. While fixed rates for an owner-occupied purchase are ranging from 4.09% - 4.49%. This means variable rate mortgage holders are saving more than 1% interest when compared to fixed rates.

So what happens to your variable rate if the prime rate goes back to the pre-pandemic level of 3.95%? Let’s take a look at some numbers based on average discounts on variable rates:

• Variable Rate based on pandemic discounts: 3.95% - 1% = 2.95%

• Variable Rate based on current discounts: 3.95% - 0.5% = 3.45%

Based on the average discounts during the pandemic, and even current discounts on variables, you will still be paying less than the fixed rate today, even if the Prime Rate goes back to the pre-pandemic level! Once inflation slows down and starts to get closer to the 2% target, the BoC could potentially start to bring the overnight lending rate back down. Economists have been predicting rates to stabilize and come down in 2023 - 2024.

Should I lock into a fixed rate now?

Although there are risks with variable rates, as you can expect your rate to increase in the next 12-24 months, there are still risks in locking into fixed rates that are higher than pre-pandemic levels.

DO NOT PANIC! We encourage clients to consider their future plans and look at where interest rates may sit in the next few years, rather than just the next 6-12 months. The last thing we want is for our clients to lock into a rate out of panic, without considering the penalties that come with a high fixed interest rate. Think about the bigger picture: if there is a possibility that rates may come down in 2-3 years' time, would you want to lock in? Or, would you prefer flexibility?

The BoC began the rate hikes this month. The market predicts a few more rate hikes to come, which may bring the overnight lending rate to 2% by the year-end or early next year. The next BoC meeting is on June 1st, 2022, stay tuned for any rate updates!