Fixed rates going up? Should you be concerned?
You may have seen or heard reports of pending fixed rate increases. The media loves to spread and focus on bad news more than good news. That’s the media for you, though.
This is your notice that fixed rates could go up over the next few weeks. Now that we have that out of the way, let’s talk about what you should do. Personally, I am doing nothing. I am keeping all my mortgages in a variable rate. The reasons are simple.
We don’t expect the Bank of Canada to increase the prime rate for a few years, or possibly even longer. In fact, the Bank of Canada has made it clear that they will not raise the prime rate until at least 2023. However, fixed rates are priced on the Government of Canada bond yields. Bond yields have gone up slightly due to an increased sense of optimism about the economy recovering in the coming months. Just last week, Canada purchased $436.5 million in provincial bonds in hopes of re-inflating the economy. This has a direct impact on fixed interest rates.
Bond prices and interest rates have an inverse relationship. As bond prices fall, fixed interest rates rise. As yields rise, prices on bonds drop. This occurs to make bonds with higher interest rates more attractive to investors since older bond rates are locked into their original terms and therefore will not offer the newer, higher interest. For this reason, we may see interest rates increase for fixed rate loans.
The increase in bond yields may only be temporary, however. Excitement over Joe Biden taking over the white house and the rollout of the vaccine has sparked a sense of optimism about the economy. In my opinion, it is still too early to tell if the optimism is well founded.
It’s always been my strategy that we should only ever consider locking into fixed rates IF we expect rates to go WAY up and for an extended period of time. Currently, this seems unlikely. Fixed rates go up if there is strong optimism in the economy. There is a sense of optimism, but is it tangible? We are not out of the pandemic yet. We don’t even know what the collateral damage has been to businesses and jobs. The government still has us on life support with their subsidies. The government also has not tabled a budget in almost 2 years.
There is still a need to act with caution when it comes to making decisions based on the projected economic growth. Many things need to happen for the economy to really get back on track. Staying in a variable rate mortgage seems the smarter idea for now, since if interest rates rise, a variable rate mortgage will remain unaffected.
You are free to decide for yourself. As for me, I’ll stay with a variable rate and enjoy the lower payments as long as possible. If I ever have to exit any of my mortgages, I know that I’ll only ever have to pay a three month penalty instead of a potential Interest Rate Differential (IRD) with a fixed rate.
I hope that this helps answer your questions about fixed rate increases. Feel free to reach out to my office with any questions.
Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.
Steve Garganis View All
As an industry insider, Steve will share info that the BANKS don't want you to know. Steve has appeared on TV's Global Morning News, CBC's "Our Toronto" and The Real Life TV show. He's also been quoted in several newspapers such as the Globe and Mail, The Toronto Star, The Vancouver Sun, The Star Phoenix, etc.
Do think that if FRM’s continue to climb at their current pace, and the overall conditions of the economy remain clouded, a correction could occur in housing? Thanks for the article nonetheless – really informative 👍👍
Fixed rates will most likely not go up for an extended period. But if they do, then yes, this will cool off the red hot housing market. That’s fine by me.