We've all felt the impact of inflation this year. The Bank of Canada raised its benchmark lending rate several times in 2022 to slow inflation. “Inflation is being driven by rising energy and food prices and supply disruptions, in combination with strong global and domestic demand," the Bank of Canada explained in their media statement. It was the first time the rates had been hiked since 2018. The cost of borrowing for various loans, including mortgages, rose due to this increase as well.
What does that mean dollar-wise? A 50-bps rate increase translates into a roughly $25 higher monthly payment per $100,000 of debt, based on a 25-year amortization. So, if you were a variable mortgage holder, you could have easily seen a mortgage interest increase of $50 to $200/month.
Given the current economic climate and how quickly interest rates have been climbing, choosing a mortgage that you can afford today, and tomorrow is crucial. As you may be aware, there are two types of mortgages: fixed interest rate mortgages and variable interest rate mortgages. Let’s take a look at both.
Understanding Fixed Mortgages
A fixed mortgage is one where you have the same known interest rate throughout the term of your mortgage. If you "lock-in" a rate of 4.14% for a 5-year term, you'll pay that interest rate over the next five years. No surprises. In fact, in this climate, fixed-rate mortgage holders will not see an immediate impact, so we often advise our members to go for this type of mortgage.
According to research by the Mortgage Professionals of Canada in 2020, around three-quarters of mortgages in Canada were fixed, indicating that many Canadians prefer the financial certainty that comes with a locked-in rate.
Understanding Variable Mortgages
On the other hand, variable mortgages are a bit more of a gamble and where most big banks and financial institutions stand to make higher profits. With a variable mortgage, your interest rate rises and falls as Prime rises and falls. Prime is heavily influenced by the Bank of Canada's benchmark lending rate and ties our mortgage rates to economic conditions.
So, in an ideal, thriving, stable economic environment, you could take advantage of low interest rates. But does that really work? The issue lies in today’s environment where it feels like the rates have been climbing every week. A mortgage you could once afford could quickly become taxing on your finances.
What should you do?
We know that the choice between a fixed or variable mortgage is not an easy one. It is a decision that will have long-term consequences for a homeowner, and it might mean thousands of dollars in interest savings. So how do you choose? While individual preferences may vary, here is some essential advice that everyone can follow.
If you have a variable mortgage, now is the time to consider if it is worthwhile. At Innovation, we always have our members’ backs. Our goal is to support our members and give them the best financial advice, irrespective of our revenue models or income.
Keeping the current climate in mind, we urge you to think about switching to a fixed mortgage. It could save you considerable money and stress in this rate-changing environment. A fixed mortgage rate has one valuable feature that is difficult to quantify: peace of mind. And there’s no penalty for making the change! Now that’s Responsible Banking!
If you have any further questions or would like to switch your mortgage, we would be happy to help! Contact us today.