As Public Enemy once told us, "Don't believe the hype...don't, don't, don't believe the hype".
By now, you have likely heard that mortgage interest rates are on the move. Bond yields are at a two-year high, and inflation continues to sky-rocket to levels not seen in decades. Scary stuff, right? It only seems fitting that interest rates will start to rise too.
I have been receiving many calls and messages from Variable Rate Mortgage holders asking if they should lock into a Fixed Rate.
With the Bank of Canada set to make their first key interest rate announcement of 2022 next Wednesday (Jan 26th), Economists have widely speculated that Canada's Central Bank could start raising their key interest rate right out of the gates.
But what does that really mean for borrowers, especially for you Variable Rate Mortgage holders who have been lucky enough to have these ultra-low interest rates for quite some time?
Here's the thing. The Banks LOVE Fixed Rate Mortgages, and 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.
Here are the facts:
- Variable Rates remain LOW. The average Variable Rate Mortgage is currently around 1.35-1.70%.
- Fixed Rates are rising. While I have been typing this post, I received a message from one of the Big 6 Banks, telling me that they are raising their 5-year Fixed Rate to 3.29%, effective tomorrow.
- Variable Rate Mortgages are tied to the Lender's Prime Rate, which is influenced by the Bank of Canada's Overnight/Key Interest rate. When the Bank of Canada increases or decreases their key interest rate, the Banks usually increase or decrease their Prime Rates accordingly.
- Historically, the Bank of Canada *usually* increases their Key Interest rate in increments of 0.25% (in rare cases, by 0.50%).
Consider the following scenario:
A $500,000 mortgage with a 25 year amortization and a Variable Rate mortgage at 1.50% = current Monthly Payment of $1,999.68.
- If the Bank of Canada increases their Key Interest Rate by 0.25% next week, this would raise the Variable Rate to 1.75%, increasing payments to $2,058.95. That's a difference of only $59.27 per month.
- If you were to lock yourself into a 5-year Fixed Rate at 3.29%, your monthly mortgage payment will be $2,441.25. That is a difference of $441.57 per month!
- In addition to this $441.57 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 SEVEN times before you arrived at where Fixed Rates are right now. It's important to keep in mind that the Bank of Canada makes just 8 rate announcements per year.
So...is it possible? Maybe. But, given the state of our economy after enduring this wicked pandemic, I feel the likelihood of this happening very quickly is very slim.
So, don't panic!
NOW is the time to be taking advantage of this ultra-low rate environment!
Make extra payments to your mortgage, if you can.
Put aside that $441.57 per month into a savings account, if you are concerned about rates rising in the future.
And CONGRATULATIONS on all of the money you have been saving!!
One last thought:
Again, Public Enemy said it best: "False media - We don't need it do we? [...]...Don't believe the hype."
This article recently came out, among other sensationalized headlines: "Bank Of Canada Will Raise Rates 500% This Year, To Start Within Weeks: National Bank"
Guys, with the Bank of Canada's Key Interest Rate currently at 0.25%, a "500% increase" is just 1.25%.
Be smart with your money. Be aware. And don't believe the hype.
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