In her keynote speech last week, Deputy Governor of the Bank of Canada, Sharon Kozicki, asserted that the Bank of Canada is "prepared to act forcefully" to bring inflation back down to 2% by using their monetary policy tools. However, she also confirmed that the Bank is cautious about tightening their monetary policy too quickly which could further promote inequality and hardships for some households.
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"While we will watch developments with respect to households closely as we proceed, it's important to be clear: Returning inflation to the 2% target is our primary focus and our unwavering commitment. We have taken action and will continue to do so to return inflation to target, and we're prepared to act forcefully" -  Deputy Governor - Bank of Canada, Sharon Kozicki, March 25, 2022: https://youtu.be/IlKh0yAJMOg

In light of Ms. Kozicki's speech, many economists are now predicting that the Bank of Canada will announce a 0.50% increase to their key policy rate in their April 13th announcement.

So...is now a good time to panic? Should you lock into a Fixed Rate Mortgage?

Fear of the unknown is a large driver in the mortgage market, and there is a reason why 3/4 of mortgages in Canada are Fixed Rate Mortgages. People find comfort in predictability...and so do the Banks.

But... Isn't it important to consider that the 1/4 of Canadians with Variable Rate Mortgages have been the big winners and paid less overall interest for over a decade?

Inevitably, rates will rise. The "emergency" low rates of the pandemic cannot last forever.

We cannot predict the future. However, what we CAN do is explore the past and learn FOR our future.

Let's look at some quick and easy numbers:

Let's say you have a $500,000 balance with a 25 year amortization and a 5-year closed Variable Rate Mortgage at Prime Rate minus 0.80% right now. 
That 0.80% is called your "discount", and you will have your discount for your entire 5-year Variable Rate term. 
With Prime Rate currently at 2.70%, this means that your current interest rate is 1.90% (2.70% - 0.80% = 1.90%), and your monthly payment is $2,095.01.
(In fact, your rate may even be lower...some of you may have been lucky enough to secure Variable Rate discounts over 1.0% recently!)
In contrast, current 5-year Fixed Rate Mortgages with many of the Big Banks have now risen to approximately 3.89% to 4.14%! With a $500,000 balance and a rate of 3.89%, these fixed rate payments would be $2,600.37.
Therefore, there is now an interest rate difference of nearly 2% between Fixed and Variable Rate Mortgages, and this amounts to a savings of $505.36 per month for Variable Rate Mortgage holders.

But...What if Prime Rate rises?

If the Bank of Canada acts "forcefully", as they say, and raises their key interest rate by a half percent in April (raising Prime Rate to 3.20%), this will drive your Variable Rate interest rate to 2.40%.
$500,000 at 2.40% = $2,217.99/month
$500,000 at 3.89% = $2,600.37/month
With a Variable Rate Mortgage, you would still be saving $382.38 per month.

Let's say that the Bank of Canada acts even more aggressively and raises rates to "pre-pandemic" levels. After all, Prime Rate in October 2018 went as high as 3.95%, and stayed that way until April 2020, when it dropped to 3.45% at the beginning of the pandemic.
In this scenario, even if the Bank of Canada raised their key interest rate and Prime Rate rose to 3.95%, your rate would still only be 3.15% (3.95% - 0.80%). 
$500,000 at 3.15% = $2,410.25/month
$500,000 at 3.89% = $2,600.37/month
With a Variable Rate Mortgage, you would still be saving $190.12 per month.

Let's go back even further in time to our last recession from October 2008 to May 2009. Granted, the world has changed a lot since then, especially the real estate market! During this time period, Prime Rate rose to 4.50%.
In this scenario, even if Prime Rate rose to this past-recession rate of 4.50%, your rate would be 3.70% (4.50% - 0.80%) ...again, still lower than current 5-year Fixed Rates right now.
$500,000 at 3.70% = $2,557.07/month
$500,000 at 3.89% = $2,600.37/month
With a Variable Rate Mortgage, you would still be saving $43.30 per month.

Don't forget...what goes up must come down! If you look at historical Prime Rate changes over the last 14 years in the chart below, you will see that Prime Rate has fluctuated from as high as 4.50% to as low as 2.25%. With a Variable Rate Mortgage, remember that rates may rise and fall multiple times during the term of your mortgage. While rates may be high for a period of time during your mortgage term, you may actually pay less interest overall due to the period(s) of time where you saved interest (when Prime Rate was low).

​ Attention Variable Rate Mortgage Holders:
Do Not Panic.
The Bank of Canada raised its key interest rate by 0.25% today - just as they have been telling us that they would.
Citing uncertainty due to the unprovoked invasion of Ukraine, high inflation, and a stronger than expected first-quarter growth, the Central Bank did just as we expected.
The biggest question is..."SHOULD I LOCK IN?"
Remember: It is just a 0.25% increase. We knew this was going to happen at some time or another! It was part of your mortgage strategy.
Please consider the following:
The monthly payments on a $500,000 mortgage with a 25 year amortization and a Variable Rate at 1.50% was previously $1,999.68 per month.
A 0.25% increase in rate to 1.75% increases your payments to $2,058.95, which is a difference of only $59.27 per month. If you have a static payment variable rate, your payment won't change at all.
If you were to lock yourself into a 5-year Fixed Rate at 3.29%, an average 5-year fixed rate in the industry right now, your monthly mortgage payment would be $2,441.25. That is a difference of $382.30 per month, or $4,587.60 per year!

In addition to this $382.30 extra per month, you would be changing the flexibility of your mortgage. If you ever need to break a Variable Rate Mortgage, the penalty is just 3 months of interest (around 0.5% of your mortgage). In contrast, penalties for breaking Fixed Rate Mortgages are determined using the "Interest Rate Differential", a calculation that can be up to 4.5% of your mortgage balance!
The Bank of Canada would have to raise their Key Interest Rate SIX times before you arrived at where Fixed Rates are right now, as they usually move their rates in increments of 0.25%. It's important to keep in mind that the Bank of Canada makes just 8 rate announcements per year.
Prime Rates with the lenders will likely rise from 2.45% to 2.70% today. The highest Prime Rate has been in the last 12 years is 3.95%...only 1.25% higher than today.
I've done the calculations, and even if the Bank of Canada increases their rate by 0.50% per year for the next 5 years, you will still come out thousands of dollars ahead with a variable rate mortgage right now.
Remember, the Banks LOVE Fixed Rate Mortgages, and would love to see you locking into those fixed rates right now. The Economists that you often see quoted in the news are paid by the Banks. These same Economists have been predicting a rate increase of 1.50% or higher for over 10 years...and they have been WRONG. Historically, Variable Rate Mortgage holders have always "won" the rate game.
So...Don't panic! Keep calm, stick with your strategy, and remember that the sky is not falling.
NOW is the time to be taking advantage of this ultra-low rate environment!
Put aside that $382.30 per month into a savings account, if you are concerned about rates rising in the future, or
Use your prepayment privileges that came with your mortgage to make extra payments to pay down your mortgage balance quicker.
Be PROACTIVE!
And CONGRATULATIONS on all of the money you have been saving!!