Preparing for Higher Rates
November 26, 2021 | Posted by: Jeremy Schaffner
Given inflationary pressures, the Bank of Canada indicated in their last rate announcement that rate hikes could take place earlier than previously indicated, in mid-2022, which means variable rates that rise and fall in tandem with the key rate will start climbing. Views among economists vary as to how many hikes we'll see in 2022 and 2023 because no one really knows whether inflation is truly transitory given supply chain issues, or even if it won't be a long-term issue at all.
Keep in mind that even with the projected increases, we'll still be in an ultra-low-rate environment and an incredibly stable market. We've also seen increases before to only see them decrease again. But rates will likely rise, so here are answers to the questions I'm getting:
What is the impact on my current mortgage? With variable rate mortgages, as rates rise so too will be the amount of interest you pay. While your payment often doesn't increase, you'll pay less principal and more interest. Fixed-rate mortgages - which are based on the bond market – have already been trending slightly upward, although if you have a fixed mortgage, you aren't affected until it's time to renew. Consider taking advantage of your prepayment privileges and increase your payment so at renewal, you are accustomed to paying the higher amount.
Should I refinance now? Many have already taken advantage of low covid mortgage rates to refinance their current mortgage to get a lower rate, for debt consolidation, renovations, or to help a child buy a home. If you feel this is a good opportunity and want to access these low rates that won't be around too much longer, please get in touch for an analysis of whether it makes good financial sense.
Should I lock in my variable rate mortgage? A key question to consider is - why pay more money than you have to? It will take several prime rate increases for variable rates to be on par with a fixed rate, and you are likely better off sticking with your original strategy of focusing on payment vs. rate. Preparing for higher rates is different than locking in. You can prepare by increasing your payment amount if your budget allows, so you are paying down more principal and building a buffer for later.
But if it's going to keep you awake at night then let's talk about your conversion options. Remember though, you should be confident you'll stay in a 5-year fixed mortgage for the entire term. Breaking a fixed mortgage can result in some onerous penalties. If you aren't sure you'll stay in the mortgage for 5 years, the interest rate risk of a variable mortgage may be a better option than the penalty risk of breaking a fixed mortgage.
What if my mortgage is coming up for renewal? Don't feel rushed or pressured by a renewal letter or call. Let's discuss your options. We'll review your renewal offer together and I'll shop around to see if it's really the best deal available. Do you have too much other debt? This may be the time to roll it into a new mortgage to boost cash flow and save on interest costs.
Should I jump into the market now? The prospect of higher rates could cause a sense of urgency among homebuyers to get their mortgages before those increases take place. My advice is always the same: buy when you are financially ready. Don't jump the gun just because rates "may" go higher. But, if you're thinking about buying, I can arrange a pre-approval, so you're protected from rate increases for up to 120 days while you shop around.
Should we talk? Yes for sure. You should have confidence in your mortgage plan and that's why professional mortgage advice is so critical. I have access to a wide range of lenders and know the right questions to ask to assess your situation and make sure you have the best mortgage strategy for whatever is ahead.