“The reality is we'll probably see rates go up this year”
The connection between the pandemic and rising prices is obvious. Thanks to recent big spending by consumers with unspent lockdown cash, coupled with supply chains broken by COVID-19, the cost of everything from groceries to TVs is soaring. In 2021, inflation for goods was 4.4% – well over what economists consider acceptable, at 1% to 3%.
Less obvious is the impact of that imbalance in supply and demand on mortgage payments. But the connection is likely soon to become clear for some, as the Bank of Canada (BoC) seeks to bring consumer costs under control by raising its policy interest rate – not done since October 2018 – to slow the flow of money through the economy.
Mortgage lenders use that rate to determine the interest they charge customers. Since the onset of the pandemic, both have hit historic lows. Have they finally bottomed out?
“The reality is we'll probably see rates go up this year,” says Renée Stribbell (Human Resources ’97), a mortgage broker and co-owner of Platform Mortgage. “By how much? That’s the question and nobody knows the answer.”
What we do know, thanks to Stribbell, is how best to navigate whatever change may come, whether we own a home or are considering making the purchase in the months to come.
Variable or fixed?
“I’m a huge fan of variable-rate mortgages,” says Stribbell, who’s been a broker for more than two decades.
While fixed-rate mortgages give borrowers the peace of mind of making the same payment over the course of the term of the loan, they're typically more expensive than variable rates, she says. In mid-January 2022, an average variable rate was 1.2%, while fixed averaged 2.6%, Stribbell points out.
The trade-off is that a variable rate fluctuates with the BoC’s policy interest rate. When the latter rises, so does the amount owing toward interest in the former. Or, both can go down – as they did in March 2020, when the policy interest rate dropped to 0.25%.
Though it stayed that way through January 2022, that's likely about to change.
Not to worry, suggests Stribbell.
How the BoC sets rates
Could variable-rate mortgage holders get stung by the BoC's turn of heart? Stribbell doesn’t think so, based on how rate hikes occur.
“When the Bank of Canada looks at raising interest rates they typically do it in 0.25% increments,” she says. “It’s very rare that you’ll see them do more than that. They’re very cautious.” After all, she adds, “you don’t want to throw cold water on an economy that’s trying to grow.”
What’s more, the timing of BoC decisions is predictable. We may not know exactly what it will do at any given time, but we know when the mystery will be revealed. The bank schedules eight meetings a year to settle on the policy interest rate, always on a Wednesday.
Budget for adjustments
While you should pay attention to those meetings, you don’t need to be ready to lock in your mortgage at the best (but always higher) available fixed rate on a Tuesday night. “Let it ride” might be a gambler’s motto, but Stribbell uses it just the same; she considers staying the course with a variable rate to be a safe bet. History and math are on her side.
“Since the Bank of Canada moved to a schedule for announcing rates, the most I've seen is a 1.25% increase over a 15-month period,” she says.
“Let it ride” might be a gambler’s motto, but Stribbell uses it just the same.
As for the math, Stribbell points to current rates. The difference between a 1.2% variable rate and a fixed rate of 2.6% is 1.4%. That means the BoC would have to increase its rate (assuming an increment of 0.25%) six of the eight times it meets in 2022 before you’d have something to regret.
Instead of locking in, says Stribbell, make sure you’ve budgeted properly. While you might be paying 1.2%, always be prepared to pay the 2.6%. The spread may shrink, but you’ll still have savings to use as you like.
Don’t worry too much
Those eight days are a source of excitement for pundits and financial columnists, Stribbell points out. Some will be absolutely certain that the BoC will raise or lower rates, while others insist it will hold steady. Until the day comes, “We’re all guessing.”
It can be an educated guess. Somewhere between all the speculation lies a likely outcome.
Years ago, says Stribbell, interest rates were more erratic, sometimes jumping by double digits. In the age of the pandemic, reasonable changes from the BoC may be among the few things we can count on to help plan for the future.
“As long as my [variable] rates are lower than the fixed rates,” says Stribbell, “I don’t see a point in locking in.”
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