The Bank of Canada hiked interest rates today by 0.50%, this is the biggest hike in over 2 decades (usually it's always been in increments of 0.25%). Many clients are in panic mode. Past clients are asking if they should lock in their variable to a fixed, and new clients are asking if they should take a fixed rather than a variable though rates are increasing.
Here are my thoughts:
Should a client lock into a fixed?
Most clients in the last 3 years who took on a variable rate have discounts on prime of 1% +. This means most of their rates are currently at 3.20% - 1% = 2.20% [3.20% is the new prime starting tomorrow]. Fixed rates are currently sitting at 3.80% - 4.14%. This means they are still saving about 1.50% in interest!
For new clients taking on a variable rate, most discounts are only about 0.30-0.40%. If you can get a discount more than 0.50%... you're lucky! But even at that... their rate tomorrow will be 3.20% - 0.30% = 2.90%. So they are still saving 1% interest!
In the absolute worst case scenario, if the Bank of Canada increases rates 3 more times this year (so up another 0.75%), then the prime interest rate will be 3.95% (which is back to pre pandemic level). Then the past clients would be paying 3.95% - 1% = 2.95%, and the new clients would be paying 3.95% - 0.30% = 3.55%.... still lower than the fixed rate today.
Economists are expecting fixed rates to come down later this year, as they are expecting bond yields to come down. As for variable rates, once inflation slows down and starts to get closer to the 2% target, the BoC will likely start to bring the overnight lending rate back down. We can likely expect rates to stabilize and come down in 2023 - 2024. So, do I think there is more risk locking into fixed rates that are higher than pre-pandemic levels? Yes. I would still recommend riding out the waves of variables and keeping that flexibility.
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