What Does the Bank of Canada Rate Policy Mean for My Mortgage
As most of you are aware, the Bank of Canada left rates unchanged last week. For a more detailed analysis of the announcement please click here. With no imminent rates hikes in sight, many borrowers are wondering how this may affect their borrowing options.
How Does the BoC Announcement Affect my Mortgage?
The current mortgage market reminds me of a recent comment by my daughter. I had just driven her and her sister home from a birthday party where they had spent two hours filling themselves with hotdogs, pizza, cake and candy. All in all a great day. When we arrived home the younger one found a jelly bean in her pocket, to which the older one replied “Aww, she’s so lucky”.
With rates continuing to stay low, even borrowers who don't do a thorough analysis of what is best for them are still likely to do pretty well with their mortgage. That being said, we all want to do the best we can given the information available and pick up a few extra jelly beans if we can. In addition, although rates are low current buyers have to contend with high home prices (partly due to such low rates) which impacts affordability. So let’s take a look first at the decision between fixed and variable and then at what a longer term can offer.
Fixed vs. Variable:
A variable rate comes out ahead most of the time. However, there is considerable support for the argument that now may not one of those times. A variable will definitely save you money up front but the difference between a five year fixed and a five year variable is only about 0.3% at the moment. One ¼% rate hike by the Bank of Canada and you’re about even. No one has completely ruled out the possibility of a rate drop, but most analysts think it highly unlikely.
It’s also important to understand that fixed and variable rates march to different drummers. The Bank of Canada’s target overnight rate determines the Prime Rate and, therefore, variable rate mortgages. Fixed rates are governed primarily by what’s happening in the bond market which, although heavily influenced by the Bank of Canada and what is happening elsewhere in the economy, is not strictly tied to the Bank’s interest rate policy. Even though the Prime Rate has not moved since September of 2010, the best 5 year fixed rates have been almost as high as 4% and under 3% during that same period.
If the Bank of Canada begins hiking interest rates a year from now you might be able to lock in at the 2.99% fixed rate that we see today but it could also be 3.5%. As always, much of the decision whether to go with a fixed rate or a variable rate comes down to your budget, your risk tolerance and your time line. If you’re selling your house in two years a variable is probably the way to go. If you’re in for the long haul the savings are much less certain.
Speaking of the long haul, in the next post we'll look a little further at the 10 year fixed mortgage that is gaining in popularity
Thanks for reading
Posted by John Freeland Smith
on March 13, 2013