For the first time in almost 7 years, The Bank of Canada (BoC) has raised the prime lending rate by ¼ of a percent, it increased from .50% to .75%. Doesn’t seem like a very big increase but it does have the potential to cost all of us more money as it affects the rates charged on variable rate mortgages, lines of credit, car loans and credit cards.
For those of you who are currently in a variable rate mortgage term, you may have never experienced an increase in the prime rate. I know many of you reading this are nervously eyeing fixed mortgage rates and wondering if now is the time to convert to a fixed rate mortgage term before they go up even higher.
Canada today is a long way from where it was in the early 1980’s when Canada pushed its benchmark rate up so high that the average mortgage rate was as high as 21%.
Since then, the average rate has been steadily declining and the last time mortgage terms were at a double-digit interest rate in Canada was in the mid-nineties. That means for 30 years, choosing a variable rate term has been the best choice
One of my favorite Economists to follow is Will Dunning of Mortgage Professionals Canada and he states: “So in the short term, there is a very high degree of uncertainty in interest rates. If the current level of yields is sustained or rises even more, we should expect some increases in rates for fixed mortgages. But looking further ahead, the lack of inflationary pressure should prevent any significant rises in bond yields. There will always be week-to-week movements in interest rates, but the balance of probability is that it will be a long time before we see a significant and sustained rise.” (1)
So, the question is, “should I stay variable or lock my mortgage into a fixed rate term?” There are a lot of moving parts that could push interest rates higher this year, however, over the last fifty years, variable-rate borrowers who convert to a fixed rate term tend to pay more over time than if they had stayed variable. While the past does not necessarily predict the future, in his famous fifty-year study that compared fixed and variable mortgage rates, Dr. Moshe Milevsky (2) found that variable-rate borrowers who convert mid-term typically paid more than variable-rate borrowers who stuck it out. In other words, converting your variable rate today will give you peace of mind, but history says that you will probably be locking in additional cost over the long run.
Still stressed? This is where you need to take a calm approach to your decision. Speak to an expert or read up on the various opinions offered by many and make an informed decision on what is best for you. In a nutshell, I believe the worst of the fixed rate hikes are behind us and if in a variable rate mortgage, staying the course will prove the best option.
Still not sure what to do, contact the MortgageGirlca and see what options you may have. Contact Jackie via email: firstname.lastname@example.org , MortgageGirl Website, Twitter or Facebook or call 780-433-8412
- Dunning Will, (July 2017) retrieved from: https://www.ratesupermarket.ca/mortgages/rate_outlook_panel
- Milvesky, Dr Moshe(March 25, 2001) https://www.ratehub.ca/docs/mortgage-reports/york-university-mortgage-financing-floating-your-way-to-prosperity-2001.pdf