10 up and 3 down, unintended consequences!

LOTS OF MOVEMENT IN MORTGAGE RATES

Sounds like a football play. But I’m not talking about football even though the NFL season just started and my Buffalo Bills won their first two games. I’m referring to how many times the Bank of Canada’s (BoC) Governor, Tiff Macklem, has changed the Overnight rate since March 2022.  

Did you know we saw 10 rate hikes totaling 4.75% in just 16 months from March 2022 to July 2023?  That’s never happened before.  And most of those rate hikes

were also extraordinarily high.  The BoC increased the Overnight rate 4 times by the usual 0.25% change.  They also increased it another 4 times by  0.50%, and again by a whopping 0.75% and finally once more by an incredible 1.00%.

Now let’s get to the good news.  Fast forward to the summer of 2024.  We’ve had 3 consecutive rate cuts by the Bank of Canada beginning in June. Our current Bank rate is 4.25%, down from 5.00%.  The Bank Prime lending rate is now 6.45%.  Spoiler alert.. It’s not enough and we can expect to see several more rate cuts over the next 12 to 18 months if not longer.  

WHICH PRODUCT SHOULD YOU CHOOSE TODAY?

Anyone that has to renew their mortgage, has to refinance their mortgage, or is buying a home in the next 12 months should really consider choosing a Variable rate mortgage.  And while the BIG SIX BANKS would love to see everyone choose a 5 year fixed rate mortgage, it will most likely be a poor decision for the Consumer.   By the way, can you guess which mortgage product and term the Banks make the most profit on?  Yup, 5 year fixed rate.

Today, a 5 yr fixed rate mortgage rate can range anywhere from 4.19% to 4.94% depending on many factors. Variable mortgage rates are between 5.55% and 5.95%. The tough choice most of us will face is whether getting into a new 5 yr fixed rate term is better than choosing the Variable rate which is around 1.00% higher. 

Tough question but maybe this will help.

Taking a bird’s eye view of things might make this an easier decision. Some questions to ask. Where are rates expected to go over the next 2 to 3 years?  Usually, this is difficult to answer. Today, the answer is obvious.  Every economist expects the Bank Prime rate will fall much further… by between another 1.25% to 1.75%.  If you believe this, and I do, then that means the Variable rate should be under 4.00%. Fixed rates are also expected to fall below 4.00%.  This ends up being lower than any fixed rate product today.  

This makes choosing Variable rate a viable option. Remember, you can lock into a fixed rate at any time with most Variable rate mortgage products. 

It’s worth understanding how the BoC rate affects fixed rates.

Fixed rates are priced against the Government of Canada Bond yields. If these yields go up, the fixed rate will go up. If they go down, fixed rates will go down. The Government of Canada bond yields are not directly affected by the Bank of Canada rate but they are indirectly affected. Fixed rates have begun their anticipated (and long overdue in my opinion) move downwards. We can expect Fixed rates to continue to fall.  

CONCLUSION.

Forecasting rates can be a dangerous game. However, we all have to make an assessment and plans based on the knowledge in hand.  Today, Variable rate is a good option for most of us.  

Personally, I would go Variable but that’s just me.

And for those that can’t sleep at night because they are worried about being in a variable rate product and/or are happy with where fixed rates are currently, then you may want to choose a fixed rate product.

Bonus tip…Put some thought into your mortgage options. 

Throughout my 35 year career in financial services, I’ve been amazed and surprised at how little time most of us take to understand their mortgage options. Many of us will spend more time researching a vacation destination. 

With any financial decision, please don’t rely on TikTok, Instagram, or any social media post for your advice.  Speak with an accredited mortgage professional.  This is our biggest debt and tied to the biggest investment for most of us, our homes.  Take the time to seek out a professional, and spend the time to understand your options. You could be saving or losing $$thousands. 

Don’t know anyone? Get a recommendation from a trusted advisor or friend, your lawyer, etc.

Oh, and last tip… Please be careful about relying on your banker.  That’s like asking McDonalds, “Who makes the best hamburger”?   Seek out an independent unbiased Mortgage Professional. 

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: 416-224-0114; steve@canadamortgagenews.ca