Mortgage Interest Rates in Canada Fixed vs Variable
It’s no secret that interest rates have been on the rise in recent months. But where are they headed next? And how will that impact the Canadian real estate market? We explore these questions and more in our latest blog post.
Interest rates are heading marginally higher. We may see 5-year fixed rates as high as 6% however, you cannot rule out 7%.
With inflation running high central banks will continue to raise rates until inflation is under control.
It is important to remember that for 30 years mortgage rates ranged from 10-12%. It is true house prices were cheaper, but we also got paid a lot less. The point is that 7% is not outrageous.
Higher rates should fade within the next two years as we see changes to the government in the U.S.
No need to panic here, if you renew at a higher rate the impact on your monthly mortgage payment will not be dramatic.
When government spends recklessly, we all pay with high inflation. The goal of the Fed is to slow employment and cause a recession. This may reduce inflation by restricting purchasing due to higher unemployment. I know it sounds sad but that is how they play the game.
When the economy slows dramatically, and unemployment is high the Fed may return to quantitative easing in order to stimulate the economy. Along with that political parties wanting to be elected always make big spending promises to get elected and the cycle of boom-and-bust repeats itself.
2022 Housing Market
The housing market is in full swing across Canada and mortgage rates are rising regularly these days. Many buyers are wondering where interest rates are headed in the coming months.
Will rates keep increasing, should you re-finance and lock in a 5-year fixed rate? Or are we due for another bump in mortgage rates that could put homeownership out of reach for some?
Here’s a look at where some of Canada’s leading economic experts believe interest rates are headed in the coming months.
Canadian Housing Economic indicators
In order to answer the question of where interest rates are headed, we must first look at some key economic indicators. These indicators will give us a sense of where the economy is heading and how this might impact interest rates.
Some of the key indicators we will look at include:
-GDP growth
-Inflation
-Employment
-Housing starts
Bank of Canada Interest Rates
The Bank of Canada is the nation’s central bank. Its primary role is to promote the economic and financial welfare of Canada. The Bank of Canada sets interest rates to influence the cost and availability of credit in the economy, helps manage inflation, and provides certain banking services for federal governments.
In setting interest rates, the Bank must take into account a wide range of factors including inflation, employment, growth in the gross domestic product (GDP), and global economic developments. The Bank uses monetary policy tools to influence demand for goods and services in the economy, which affects inflationary pressures. In addition, the Bank works with other federal government departments and agencies on initiatives to foster a stable and efficient financial system in Canada.
The Canadian Mortgage market
In the mortgage market, there are a few things that affect interest rates and a variable mortgage. The biggest factor is the Bank of Canada’s overnight rate. This is the rate at which banks lend money to each other overnight and it influences the prime rate. The prime rate is the best interest rate that banks offer their most qualified customers. It’s also a benchmark that lenders use to price other products like variable-rate mortgages. When the overnight rate goes up, so does the prime rate and variable mortgage rates.
The second factor that affects mortgage rates is bond yields. Government bonds are loans that investors make to governments to finance their spending. When bond yields go up, it costs more for governments to borrow money and this increased cost is passed on to consumers in the form of higher interest rates.
Mortgage rates are also influenced by global events. For example, when there’s uncertainty in the markets, investors tend to put their money into government bonds because they perceive them as being safe investments. This increases demand for bonds and drives up prices, which in turn pushes bond yields lower and results in lower mortgage rates.
The Canadian Housing market
In the near term, most forecasters expect interest rates to keep increasing although that should stop soon, as the global economy slowly recovers from the pandemic. The average rate on a five-year fixed-rate mortgage has also been increasing this year and is now close to 5 percent for the first time in years.
As rates increase, affordability is declining for potential homebuyers across the country. This, combined with people’s desire for more space during the pandemic, has helped to drive strong demand for housing in many markets. Sales of existing homes have surpassed pre-pandemic levels in many parts of the country but have dropped in the latter half of 2022
Though there is considerable uncertainty in the market, it appears that interest rates will increase in the short term with more stabilization in 2023 mortgage rates. However, it is important to remember that interest rates could rise at any time, so buyers should not wait too long to purchase a home or refinance their mortgage.
What are variable mortgage rates?
Mortgage rates can be either fixed or variable. A fixed rate means your interest rate and mortgage payments are set for a certain period of time, usually between one and five years and you can usually lock in the lowest rate, especially with a mortgage broker. A variable rate changes with the prime lending rate. Variable-rate mortgages are often offered at a lower interest rate than fixed-rate mortgages for the first few years of the mortgage term.
What are fixed mortgage rates?
A fixed mortgage rate is one that stays the same for the entire term of your mortgage, regardless of changes in the prime rate. That means your monthly principal and interest payments stay the same, even if interest rates rise.
Advantages and disadvantages of variable mortgage rates
There are many advantages and disadvantages of variable mortgage rates in Canada. The main advantage is that they offer borrowers the opportunity to save money if interest rates go down. The main disadvantage is that borrowers could end up paying more if interest rates go up.
Some other advantages of variable mortgage rates include:
-The ability to make small, extra payments without penalty
-The ability to pay off your mortgage faster
-Flexibility if you need to break your mortgage
Some other disadvantages of variable mortgage rates include:
-The uncertainty of knowing how much your payments will be from month to month
-The possibility of having to sell your home if you can’t afford the higher payments
Advantages and disadvantages of fixed mortgage rates
A fixed mortgage rate is one where the interest rate stays the same for the entire term of the mortgage, regardless of changes in the market. This offers predictability and stability for borrowers since they know their monthly payments will stay the same.
The main disadvantage of a fixed-rate mortgage is that if interest rates go down, you won’t be able to take advantage of it unless you refinance. Also, if you plan on selling your home before the end of your term, you may have to pay a penalty to break your mortgage contract.
Fixed-rate mortgages are best for people who:
-are risk-averse and prefer stability
-plan on staying in their home for a long time
-don’t mind paying a higher interest rate upfront for the peace of mind that comes with predictable payments
How to decide which type of mortgage rate is right for you
Mortgage rates can be either fixed or variable, depending on the mortgage term and the lender. A fixed-rate means your interest rate will stay the same throughout your entire mortgage term, while a variable rate fluctuates with the prime lending rate.
The prime lending rate is set by the Bank of Canada and is influenced by many factors, including economic indicators like inflation. When the prime lending rate goes up, so does your variable mortgage rate.
If you’re trying to decide between a fixed or variable mortgage rate, you need to consider your own financial situation. Do you plan on staying in your home for more than five years? If so, a fixed rate might be a better option for you because it provides stability and predictability for your monthly payments.
However, if you think you might sell your home or refinance your mortgage within five years, a variable rate could save you money because it’s typically lower than a fixed rate. Just keep in mind that if interest rates rise during that time, so will your monthly payments.
The bottom line is that there’s no right or wrong answer when it comes to choosing between a fixed or variable mortgage rate – it all depends on your personal circumstances.
Conclusion
It’s important to remember that both variable and fixed mortgage rates have their pros and cons. There is no “right” answer, and the best option for you depends on your personal circumstances.
If you are comfortable with a bit of risk, or if you expect interest rates to fall in the near future, a variable-rate mortgage could save you money. On the other hand, if you want the stability of knowing your payments will stay the same, a fixed-rate mortgage may be the better choice.
The bottom line is that you should do your homework and compare mortgage rates from multiple lenders before making a decision.
