Should you lock into a fixed rate product right now?

As the Bank of Canada prepares to make its fourth interest rate announcement of the year, we thought it would be a good time to review what’s going on in the mortgage world and the rest of the economy. Rate hikes and rising variable rate products are causing banks to pressure Canadians to lock into a fixed rate product. Plus, the risk of a recession, made no simpler by the pandemic and war in Ukraine, are making a lot of borrowers worried and confused. Here, we break down what’s in the cards for interest rates and the possibility of a downturn, as well as why it’s not the time to lock into a fixed rate.

What’s coming for interest rates?

Most experts believe we are in for a few more rate hikes this year. Just to remind you, there have been three interest rate announcements from the Bank of Canada in 2022 so far. Two of those have resulted in an increase to the overnight rate, which now sits at one per cent.  As inflation continues to persist, the Bank of Canada is likely to keep raising rates to control it. Inflation is having a record year, hitting 6.7 per cent back in March and rising quicker than it has in 30 years. We have no doubts more rate increases are coming, likely starting with next week’s meeting on June 1.

Possibility of a recession

Talks of a recession have been in the news for a while, and it’s looking more likely that a downturn is something Canadians will be dealing with before too long. Many economists believe a recession is in the cards, either in 2023 or within the first half of 2024. What’s causing these pessimistic views? As we mentioned above, inflation is at an all-time high, and the bank’s response has been to introduce rate hikes to curb inflation. While necessary, these rate increases also have the potential to contribute to a downturn. Plus, we are still dealing with the pandemic. Should a new variant make an appearance, there’s no telling how this might affect the economy in terms of business and healthcare concerns. Finally, Russia’s invasion of Ukraine and the waves it is causing in the global supply market could make an impact as well.

Fixed rate products

We’re noticing a lot of pressure from banks to get their clients to lock into a fixed rate mortgage right now. As the Bank of Canada has all but guaranteed we will see several more rate hikes and variable rate increases, banks are using this language to encourage clients to make the change. However, we recommend sticking it out with a variable rate. Even with rate hikes, many people’s variable rates are still lower than today’s fixed rate offerings. This means converting to a fixed rate will likely result in a higher monthly payment right now. Even as variable rates rise, it will take several increases for them to reach the current fixed rate levels.

What can you do?

We know situations like these can be scary. An unknown amount of rate increases, plus inflation, downturns, pandemics, and wars are bound to make you nervous. However, we don’t want you to panic about your variable rate mortgage. We stress test our clients to ensure they can handle rate increases like these, so your finances don’t collapse. Even in terms of saving money, variable rates will stay lower than fixed rates for some time to come. As for the recession? Should we experience one, it won’t be for a while yet. Take some time to review your financial situation and your savings plan so you can prepare for a possible downturn.

Times of uncertainty can be intimidating, but we have all lived through them before. It’s important to keep calm, and don’t be embarrassed to ask questions if you have them. Whether you have concerns about your mortgage, budget, or interest rates, we can help you address your worries and find the best solutions for you.

If you have any questions, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770, or contact us here.