10/11/2021 - 3 min read

Is it Time to Lock in a Fixed Rate Mortgage?

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Real estate was one of the few industries that did not sustain heavy damage due to the pandemic. Low mortgage rates were a boon for investors looking to score big with cheap debt.

Aside from inflation and supply issues, the Canadian economy is back on the rails. Employment is high and economists are optimistic about the future. The Bank of Canada now forecasts that Canada’s economy will grow by 5 percent this year, 4.5 percent in 2022 and 3.75% in 2023.

In its October 27th update, the Bank maintained its overnight rate at 0.25 percent, its bank rate at 0.50% and its deposit rate at 0.25%, while hinting that it will not hold this policy indefinitely. We should expect the rate to climb up as soon as the second quarter of 2022, three months sooner than expected.

Though the central bank does not directly affect consumers, its rates are passed on to banks, who increase rates for their customers, through their credit products. One notable exception is fixed rate mortgages, whose rates remain the same for the term of the loan, usually 1 to 5 years.

The End of Quantitative Easing

The Bank confirmed that “the Governing Council has decided to end quantitative easing and keep its overall holdings of Government of Canada bonds roughly constant.”

South of the border, the Federal Reserve will also begin tapering, reducing its purchase of securities by 15 billion dollars every month (5 billion for mortgage-backed securities). If economic outcomes proceed as expected, the Fed’s tapering should end around mid-2022.

According to RateHub, discounted mortgage rates hit rock bottom in December 2020, at 1.39% – a first since 1973. They have been slowly creeping back up and increased by 60 basis points, reaching 1.99% in late October 2021.

“The variable rate is keyed off the chartered banks’ prime rate, and the prime rate is keyed off the Bank of Canada’s policy rate, so the variable rate would move up to the same degree”, said Don Drummond, economist at Queen’s University and former chief economist for TD Bank, in an interview with CTV News.

Historically, variable mortgage rates move in lockstep with the banks’ prime rate, which is responsive to the Bank of Canada’s prime rate. Because they fluctuate, when rates rise, a higher amount of your mortgage payment will be allocated to your interest.

Fixed or Variable Rate Mortgage?

When choosing your type of mortgage, timing is key. If you choose a fixed rate mortgage now, you have up to five years of stability until you adjust to future rates. Then, you can worry about the going rates, and possibly use a variable rate mortgage if you expect rates to decrease.

If you are in the market to purchase a home, you can expect rates to climb slowly, so this should not affect your decision. Your decision should be strictly about whether the home fits your needs as a resident or investor, and if you can afford it now and in the future.

However, if your mortgage is coming to the end of its term or you have a variable rate mortgage, maybe it’s time you switch up to a fixed rate mortgage.

We have seen how, 90% of the time, variable rate mortgages are more advantageous on the long run than fixed rate mortgages. Maybe this is the exception that proves the rule.