The Bank of Canada (BoC) decided to increase their rate by another 0.50% on October 26 in their continuing effort to tame inflation. Many market watchers had been anticipating 0.75% and while this could be perceived as a slowing of these increases, many are still predicting another 0.25% to 0.50% increase in December when the BoC meets again.
Although the most recent increase is in line with what we expected in our last blog post, the pain is real. Initially we were referring to the inflation situation as a once in a five year occurrence. At this point we’re referring to this as a once in a generation occurrence. Some of you will remember this but, the last time we saw anything approaching what we see today was back in the early 80s.
Unfortunately, the messaging we’re seeing now seems increasingly murky at a time when we all need clarity. Economists are all over the map with predictions at this point. Some like Josh Nie of RBC Economics are saying this smaller-than-expected rate increase could be a sign that the BoC is approaching the limit of what they’re willing to increase.
On the other hand, Earl Davis with BMO Global Asset Management feels that while we may see a pause in rate increases, this is simply the BoC giving the latest host of increases a chance to work through the economy before acting further. He predicts we could see more increases in the latter half of 2024.
We are still waiting on some deeper analysis from our go-to economists at CIBC Capital Markets but for now…
WHAT TO DO?!?!?!
The level of uncertainty we face here is anxiety-inducing to say the least. Although The PMG has and continues to be a supporter of the variable rate product, we’re fielding more than a few calls from clients struggling to decide whether to lock in or ride out the storm. At the end of the day there is no perfect decision to make, there is only making a decision that is best for your bank account and more importantly, your mental health.
What follows is what we feel are the pros and cons of both sticking with a variable and locking in to a fixed:
Here are what we believe to be the pros and cons of sticking with a variable rate, or locking in to a fixed rate:
Variable Rate
Pros
- Lower rate (for now) with those clients holding a discount of prime rate less 0.50% or better
- Certain to increase in the near term but potential for lower rate through the latter half of the term
- Always cheap to break on three months of interest
Cons
- Very uncertain as to how high rates are going to go and how long they’ll stay high
Fixed Rate
Pros
- Will not change, offers peace of mind
Cons
- Higher rate (for now)
- “Fear of Missing Out” (a.k.a FOMO) if we see any rate decreases from the BoC over the next five years
- Strong possibility the penalty to exit a fixed rate mortgage could be huge if we see any rate decreases over the next couple years
A good way to think about breaking a fixed rate mortgage is this: if you borrow money at a fixed rate of 2.50% then over time rates increase to 4.50% and you decide you want to get out of your mortgage, the lender is going to be eager for you to pay your loan back and they’ll make it cheap to do so (3 months of interest, same as the variable you already have) because they can now lend that money out at a much higher rate.
On the flip side if you borrow at +5-6% and rates drop by the time you need to break the term, the lender is going to charge you the difference in interest they would have made on your loan as compared to the loss they are taking in lending the same cash out at a lower rate. These penalties can get up into the 10s of thousands depending on the difference between the rate you have and rates at the time you break.
We are always here to chat about your options, so please don’t hesitate to reach out to your broker for more insight.
Stay tuned, we’ll share a follow up once some of the heavy hitters have had a chance to comment on the state of the rate.
