Just as a little refresher, a variable mortgage rate is an interest rate that is not fixed and fluctuates periodically throughout the term of a mortgage. Your monthly payments stay the same, however, if the rate increases that means that you’ll be paying more on interest and less towards your home (the principal). And it works the other way around too!
Variable Mortgage Rates remained unchanged on May 29th and are broadly expected to stay unchanged on the next Bank of Canada interest rate announcement date July 10th.
No matter how well-researched an economist’s prediction is, mortgage rate rates are still only educated guesses and are unfortunately rarely accurate. Last year’s forecasts did, however, correctly anticipate three rate hikes, but didn’t predict an economic cooldown that would put a pause on rate hikes.
Recent economic data shows that the Canadian economy shrank in December and continued to struggle for the last three months of 2018. The housing slowdown has not proven to encourage economic growth either. Overall, economic news from April has been a bit messy and hasn’t given Canadians a lot to move forward with.
Realtors often say that housing prices will continue to skyrocket because of economic growth, but we’re looking at some drastically different results. Housing prices in cities with strong economic growth, such as Vancouver and Toronto, have recently seen some pretty substantial drops in activity, which have not been positive for the economy. In the end, the fewer homes being purchased, the longer economic growth will stall. This could also worsen home price weakness and send the economy into a downward spiral.
When rate increases eventually resume, variable mortgage rates will still be 0.5% below what would be considered a normal/neutral interest rate range for a solid economy. According to the Bank of Canada, “Governing Council continues to judge that the policy interest rate will need to rise over time into a neutral range to achieve the inflation target.” Essentially, rates will continue to rise unless there’s a recession.
There’s an upward trend in rates, with uncertainty of how large rates will rise in the next 6-months and longer into the future. Most economists anticipate a 0.25% increase in the Bank Rate in late-2019.
Variable and adjustable mortgage rates are tied to the Bank Rate (the rate at which banks can borrow from the Bank of Canada)
Let’s just say that economists aren’t very confident in what they think is going to happen. With all the economic uncertainty, banks are predicting no change in rates. And according to Desjardins, the Bank of Canada may “have to wait until summer 2020 before ordering fresh key rate hikes.”
By the end of 2020, economists expect rates to remain unchanged, but that’s pretty unlikely considering Scotiabank’s large mortgage portfolio and two expected rate increases totalling 0.5%.
This means it is likley variable and adjustable mortgage rates will rise 3.65% by the end of 2020. If this worries you then you should consider a fixed rate mortgage. Take advantage of variable rates when rates are flat or falling.
Predictions are very different, with economists at BMO predicting rates to stay low for the next two years and Scotiabank expecting rates to climb as high as they were last fall. In the case that rates stay low, this could be indicative of a recession, which isn’t really news to us – this TD Canada Trust report can tell you more about it.
The short answer is we can never know exactly, but what we do know is that it’s inevitable at some point. This TD Bank report looks at the likelihood of a recession with their Financial Stress Indicator (FSI). As you can see, there was practically no warning for the financial crisis between 2007-2008.
What You Should Do
Lock in a 5-year fixed rate?
Buy a home now or wait for the next cycle?
As you can see there’s a lot of uncertainty, and there’s no right answer to whether you take a variable rate mortgage or lock in. Future rates will probably be higher than today, and will not likely drop lower than today’s rates unless there’s a recession. So, locking in today’s 3.2% 5-year mortgage rate will definitely start benefiting you if variable rates begin climb.
If you are planning to sell or move in the next few years, however, locking in a rate can result in a large penalty fee if you cancel before the full term is completed. Just be sure that you factor this into your decision.
If you plan to buy in the next 3 years, be mindful that rising rates reduce the amount of mortgage financing a bank can offer you. This means you have less home buying budget to work with. Be mindful that home prices in many Western Canada markets have been steadily dropping since 2018, so don’t feel too pressured to rush into the market and don’t pay more than the list price.
To get access to experts who know what every lender is doing, consult a mortgage broker. They have the broadest number of options to find you suitable financing.
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