If you’re a homeowner or a soon-to-be homeowner, understanding interest rate trends are important. There’s more to the rates than simply increases and decreases. Here’s a little Interest Rate 101 to help you understand what the rates really mean.
Right now, the Bank of Canada’s target rate is 0.25%. And it’s expected to stay this low well into 2022, maybe even 2023 when our economy has recovered from COVID-19. A “recovered economy” by the Bank of Canada’s terms is when inflation has reached roughly 2 percent.
Lenders are posting competitive rates of 1.70% on a 5-year variable mortgage to 1.94% on a 5-year fixed mortgage. For borrowers, these are exciting numbers. Before you sign on the dotted line, a word of caution:
- Click-bait. Sometimes a low mortgage rate comes with high maintenance fees or larger than usual penalty charges. Always always read the fine print.
- Default insurance. Low interest rates sometimes come with an extra default insurance fee. Again, read that fine print.
- Long-term mortgages. Lower rates often don’t apply to longer term mortgages. So if you’re looking for a 30- to 35-year repayment plan, the lowest rates are likely not the ones you’ll be offered.
- Buying. If the rates are low, it makes financing easier; it can also drive up house prices if there is a short supply. So it doesn’t necessarily mean things are more affordable.
Low interest rates also bring up the old Fixed Rate vs. Variable debate. Is one better than the other? The quick answer is: not really. In this market, it’s a bit of a 50/50 split. That said, here is the information you need to know to make an informed decision:
If you’re borrowing at a fixed rate, you can expect your lender to charge a little extra interest overall. Call it the peace-of-mind fee. Sometimes this extra interest is absolutely worth it; sometimes it’s not. And without a proven crystal ball, no one can really know for sure.
Here’s what we know about fixed rates:
- Locking into a fixed rate mortgage benefits you if variable rates go up and variable rates are not expected to go up again until 2023.
- Fixed rate mortgages are ideal for the risk-averse. If you don’t like unknowns when it comes to investments, a fixed rate mortgage provides easy breathing. There’s more certainty in a fixed rate.
- Cancellation penalties are high. Cancellations penalties will ding you if you cancel before completing the full term. Hard.
More often than not, variable rates tend to be slightly lower than fixed rates because the borrower is taking on the lion’s share of the risk. That said, in today’s climate, forecasters predict that variable rates will stay low for at least the next two years.
Here’s what we know about variable rates:
- Variable rates change. It could be in your favour; it could not be in your favour. Right now, forecasters predict the former. But this is not set in stone.
- If the prime rate increases and you’re feeling worried, you have the option to lock-in. You can make your variable mortgage a fixed rate mortgage at any time.
If you’re near the end of your mortgage term, contact us. This is a good time to talk about interest rates and the best refinancing option for you moving forward.