May 02, 2022

How to Manage Fluctuating Mortgage Rates

You’ve heard the news. Earlier this month, the Bank of Canada raised its benchmark lending rate by 50 basis points, bringing it to 1.00%. The move was made 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. This is the first time the rates have been hiked since 2018. The cost of borrowing for various loans, including mortgages, will rise due to this increase.

And rate increases won't stop there. The Bank of Canada also indicated in their media statement that "interest rates will need to rise further." In June, many financial analysts believe the lending rate will increase by another 50 basis points. 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.

Should you be concerned? If you're a variable mortgage holder, you could easily look at a monthly mortgage increase of $50 to $200/month. Those holding variable rate mortgages are likely to be hit first, with costs passed along days and weeks following the rate hike.

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. No changes to payments when interest rates increase. And best of all, easy planning for your monthly budget. 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. Still, this question for mortgage seekers is expected to hit a fever pitch as the Bank of Canada begins what’s expected to be a steady stream of interest-rate increases in the coming months. 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 Credit Union, 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.