2022-01-28 | 08:27:41

The Bank of Canada announced this week that they will be leaving their key interest rate at .25%, meaning that the Bank Prime Rate remains 2.45% for now, but not for long. The Bank reiterated its position that the rate would need to go up soon from what they had called ‘emergency’ low rates brought on by the global pandemic.

Most economists are predicting an increase of 1.00% to 1.25% in 2022, which would bring the prime rate up very close to where it was pre-pandemic. This will affect mortgage payments for those of you on variable rate mortgages. The Canadian Government 5 year bond yield, which directly correlates to the 5 year fixed mortgage rate, has already gone up from their lows of last year by about 1%. This bond yield measure is a very good predictor of the financial markets expectation of the future direction of prime rate, so I don’t believe in the fringe opinions that state that the prime rate will skyrocket. A good example of how some media feels the need to sensationalize reporting came last week when a national newspaper shared a headline stating that one bank predicted “Canadians Should Expect Interest Rates to Rise 500% This Year". That sounds really ominous. It generated a lot of clicks (and calls), but when you do the math it means they believe the Bank of Canada will increase the key rate from .25% to 1.50% --- hardly Armageddon.

For a $350,000 Variable Rate mortgage, each .25% increase means your payment will go up by approximately $40 / month. Of course this isn’t what anyone wants to hear, but I have four key takeaways for you:

1/ the current rate was designed to get us through an ‘emergency’, not to become the new normal

2/ Canadians have had to prove they qualify for their mortgages based on a hypothetical rate that has mostly been in the low 5%’s for over 5 years now. This ‘Mortgage Qualifying Rate’ was designed to prevent a severe downturn in the housing market when rates did start to climb. There is no one predicting that mortgage rates are going up over 5% anytime in the near or distant future.

3/ as we mentioned in last month’s update: there has not been a period in the last 25 years when interest rates went up for 5 years

4/ the variable rate is mathematically almost always the better choice. Long term lower interest costs and much lower penalties for the 60% or so of Canadians that do not finish a 5 year mortgage term. Play the odds, go variable and stay variable.

Long term fixed interest rates are still at 3% or lower at most banks, so if you are going to lose sleep then by all means just lock your mortgage in to a fixed rate. I am all for anything that reduces stress or anxiety. But for me, the decision to start paying more interest on my mortgage now on the fear that I might pay more at some point or get hit with a massive penalty down the road causes me to worry. Life is variable, so your mortgage should be too.

As always, please feel free to call or email me anytime to discuss your mortgage. Talking to clients is my favourite part of this job! Please also feel free to share this email with anyone you think might be interested.

Let me know if you have any questions, anytime...I'm here to help!

Thanks, 

Patrick

905-299-4665

patrick@teamdugganmortgage.com