Interest rates and your mortgage

We’ve had a good long run of interest rates at record lows and it looks as if the discounted variable rate is going to stay where it is…for awhile. However, fixed rates may start to rise, albeit slowly. Let’s take a look at the variable rate.The Bank of Canada (BoC) recently announced that it was holding its trend-setting overnight lending rate at 1%. That translates into a prime lending consumer rate of 3%. Variable rate mortgages are discounted and can go as low at prime-.60 % to -.70% — that translates into 2.4% and 2.3% respectively. This overnight rate (the borrowing rate for banks) has not moved in four years. And it’s likely to stay where it is in the near future for a few reasons.
  1. Inflation is on target — Inflation is in check and recently is tracking close to the (BoC’s) 2% target so it won’t be necessary to rein it in by increasing the overnight rate.
  2. Uncertainty remains high — While the U.S. economic recovery appears to be back on track, European economic growth has fallen slightly. This means low interest rates are still needed to support Canadian economic growth.
  3. Canadian exports need help from the currency exchange rate –The Bank of Canada rate announcement noted that “Canadian exports surged in the second quarter”. The reasons cited were strengthening U.S. investment and “the past depreciation of the Canadian dollar”. Hiking interest rates too soon would result in a stronger loonie and dampened Canadian exports. The Bank of Canada is counting on stronger exports to lift business investment and economic growth.
  4. Higher exports have not yet translated into stronger investment or hiring: The pickup in exports needs to be sustained before it translates into more business investment and more hiring, so interest rates will stay stimulative.

So how does this affect your mortgage? Variable rates have a proven track record with mortgage holders, and may save you thousands of dollars in interest payments. There is, however, some risk involved and the qualifying criteria are not the same as they are for fixed rate mortgages.

Fixed Rate

The fixed-rate mortgage is the more stable of the two. Closely correlated with the bond market, fixed rates will rise and fall on bond yields. There has been some upward pressure on U.S. and Canadian bond yields recently due to improvements in the U.S. economy, countered, with global economies still showing slight signs of volatility. This has led to yields, which for now, have balanced out. So for now, the five-year fixed rates remain steady at 2.89% to 3.09%.

There is no simple answer to whether it’s best to opt for a fixed or a variable rate mortgage– it all depends. The choice of fixed versus variable is ultimately a personal decision. Each situation is unique and its best to talk with me, your mortgage professional.

So call me today to discuss your options.

Guy Ward is a Mortgage Broker in Calgary, Alberta with TMG (The Mortgage Group Alberta).