There seems to be lots of uncertainty lately in regards to interest rates and we are getting a lot of questions on where things are headed. Here is a brief summary of both fixed and variable rates to help you make an educated decision based on your own personal situation.
First of all, it must be made clear that both fixed and variable rates move independently. Fixed rates are set based on the bond markets and these rates have risen significantly so far in 2022. The variable rates are based on the Bank of Canada rate which the banks use to determine their prime rate. Another component of the variable rate mortgage is the discount on prime that banks offer and this has been slowly shrinking this year.
Right now fixed rates are in the high 4% range with some lenders even pushing the 5% barrier. These rates seem to be rising on a regular basis every 2 weeks. As of now, there is no solid prediction of where the fixed rates will level off. Borrowers must also keep in mind there is very little control the government has over fixed rates as they are market driven.
Variable rates (effectively prime rate) on the other hand, are controlled by the Bank of Canada and government policy. The Bank of Canada meets 8 times per year to set their overnight lending rate. So far in 4 meetings this year they have raised rates 3 times (2 of those have been ½% increases which is unusual). The government has indicated they are going to raise rates to combat inflation. This is traditionally how you would combat inflation, ie raise rates to slow down economic activity which would then reduce the price of goods through less demand.
However, this time around we feel strongly that a large part of our inflation problems are due to supply shortages. For instance, food products, gasoline, fertilizer, computer chips etc are all experiencing drastic price increases due to supply chain & manufacturing problems. A fair bit of this is due to the COVID restrictions we have experienced over the last 2 years and a lack of return to normal production and a balanced work force. We don’t feel the rise in interest rates will have any impact on the price of these products. It may slow down home purchases and some refinancing on homes; however, the base costs of goods most people need to live on will still be high.
Given our sentiment on the supply chain issues, we feel that a prolonged rise in rates will have a very limited impact on inflation and if anything could raise the cost of goods as it will raise the cost of borrowing for businesses. This will play out in the next 6 – 8 months and perhaps once there is a fair bit of damage to the economy there lies the possibility that the government may be forced to pause or reverse their course. As of now variable rates still offer roughly a 1.5% to 2% savings over fixed rates so there is some room to play with.
Of course everyone’s financial situation and risk tolerance are different and there is no cookie cutter response for everyone. If you are grappling with what to do please give our office a call at 604-556-3893 or email at alex.kotai@ymscanada.ca and we can discuss your situation.
For more information on our mortgage products and your preferred Abbotsford Mortgage Broker please visit our website at www.ymscanada.ca.