The Bank of Canada (BoC) kept the overnight rate at 0.25% and states it is continuing its reinvestment phase. Coming as a shock to many amidst soaring inflation of 4.8% in December, the BoC believes now is not the right time to raise rates as the economy is still dealing with tighter lockdowns and supply chain shortages. Although the job market has improved, there are still too many risks at play where a rate hike could lead to financial instability for many Canadians, especially businesses currently struggling through a pandemic.
Why Hold Steady?
- Unexpected Omicron weighing on activity and causing hardship for many
- Persistent supply chain shortages resulting in higher food and energy prices
- Canadian businesses experiencing challenges due to supply constraints, transportation bottlenecks, and labour shortages
- Consumer price index (CPI) inflation forecast to remain closer to 5% over first half of 2022
What Does That Mean For Mortgage Interest Rates?
Many Canadians breathed a sigh of relief today but even with a steady rate hold by the BoC, it does not necessarily mean the lending institutions will keep their interest rates steady as well.
For variable-rate mortgages, the mortgage lenders use the BoC key policy rate for guidance on setting their prime lending rate. Considering many lenders have kept their rates low to maintain market share, some may start slowly reducing the discounts on their prime rate soon in anticipation of a hike.
On the fixed-rate front, we’ve already seen these rates slowly rise over the past year, following the rising bond yields. To put this into perspective, just six months ago insured fixed rates were starting around 1.94%, today they are already up to 2.44%, which has given us some indication that fixed rates will likely continue to move in this direction but stay relatively low into 2023.
With the Bank of Canada holding steady today, we all need to get ready for a rate hike coming in the near term. This means it’s time to look over your current mortgage contract, investment portfolio, and cash flow with a professional to understand how a rate hike might impact you.
For those with a variable rate mortgage, now’s a great time to start speaking with a Pineapple mortgage broker about the right timing to move into a fixed rate option. You can do so at any time and without penalty, but the timing is key. A mortgage broker can help you create a plan that perfectly times the market so that you save as much money as possible.
Before interest rates hike up, we also recommend paying down as much of your loan as possible by taking advantage of your prepayment privileges. Putting more into your mortgage today can help protect you from any possible interest rate movements that could take you by surprise. Because when rates rise, those with a variable rate mortgage will see a larger portion of their regular mortgage payment going toward the interest versus principal, which can also result in higher monthly payments too.
Those with fixed rates might also want to start thinking about refinancing or switching their mortgage ahead of rising rates. Taking advantage of a lower rate today could save you tens of thousands of dollars tomorrow. And if you’re carrying high-interest rate debt on your credit cards, now is a good time to refinance your home and consolidate that debt into a lower payment amount.
An interest rate hike by the BoC will do little to improve affordability, if anything it might help slow the drastic price increases of over 20% we saw in 2021, to around 7 to 10% in 2022.
Now, this doesn’t mean first time homebuyers won’t have options – you just need a strategy in place – like using a gifted down payment, RRSP contribution, or borrowed down payment. Locking in a rate now before rates rise is also a good move and can save you money in the long run. And for those worried about a bidding war – there are ways to compete in a rising environment as a first time home buyer – a Pineapple mortgage expert can help you understand all of your options when it comes to boosting your buying power.
Talking to a Pineapple mortgage broker can also help you get clear on whether a fixed or variable rate mortgage is the right move for you. The variable rate is still lower than the fixed rate, but when the Bank of Canada starts hiking their key rate, this spread could tighten.
The clock is ticking but there’s still time to take advantage of the low rates and cheap money to use leverage to your advantage and significantly increase your returns.
Now’s also the best time to buy and lock in the rate on your pre-build purchases if you can. The Government of Canada has been flirting with a down payment increase from 20% to 35% for investment properties, so locking in rates could help you hedge against future rate hikes and the added restrictions planned for the coming months.
Although the labour market has improved and the employment rate has rebounded, the Omicron variant has weighed on growth in the first quarter.
Considering Canadians are sitting on record amounts of high-interest debt and mortgage debt, there are concerns that if rates were to rise before lockdown measures ease, there could be added pressure on households and businesses that push some into the red. To put it all into perspective, even a small interest rate hike of only 1% could equate to thousands of dollars more per year in loan payments – an amount many Canadians simply cannot afford.
There are also serious supply chain bottlenecks and a fear of a rising loonie resulting in higher priced exports overseas, contributing to concerns. But waiting too long to hike the rate is likely to cause inflation to tick higher, leading to higher prices here at home. Canadians should start planning now for future rate hikes and focus on managing their budgets until inflation adjusts.
Pineapple mortgage brokers are here to help you navigate through the market changes. To get a clear understanding of how the Bank of Canada interest rate changes will impact your financial future, contact us today.