Everybody’s mortgage situation is unique. Here, we discuss how you will know if it’s the right time to refinance your mortgage.
Mortgage rates and interest rates have been in Canadian news a lot lately. Bank of Canada announcements coupled with a red-hot housing market are having a big impact on the economy. If you’re a borrower or are hoping to enter the market, you might have some questions about what’s going on. How do rate increases impact your mortgage? Should you opt for a fixed or variable rate mortgage? When will we see additional rate increases? Here, we’ll address some of these questions and how they affect mortgage rates. You should also contact a broker for information related to your specific situation!
The target for the overnight rate, which is determined by the Bank of Canada, is the rate big banks use to borrow and lend at. Right now, the overnight rate is 0.50 per cent, a recent increase from 0.25 per cent where it had sat for nearly two years previously. These low rates were the result of the pandemic. The bank wanted to keep rates low so the economy could keep moving, and borrowing would be easier until the Canadian economy recovered. The increase to 0.50 per cent was a message from the bank that inflation and economic targets are on track. The overnight rate affects mortgage rates because it has a direct influence on the prime rate.
The prime rate is the rate lenders use when they set their interest rates for variable mortgages. When the overnight rate changes, lenders adjust the prime rate as well to reflect the current market situation. So when the overnight rate rises, so does the prime rate for variable rate mortgages. The prime rate only impacts variable rate mortgages because fixed rate mortgages don’t change during a mortgage term, even if the overnight rate does. The prime rate has been historically low for the past couple of years, sitting at 2.45 per cent when the overnight rate was 0.25 per cent. Now that the overnight rate is 0.50 per cent, the prime rate has increased slightly to 2.7 per cent. If you have a variable rate mortgage, you were likely notified of payment increases on your mortgage.
More rate increases are coming
One thing we can be fairly certain about is that more rate increases are coming. The Bank of Canada’s next announcement is in two days, and it wouldn’t be a big surprise if they decided to raise the overnight rate once again. The bank is slowly, but surely, planning to raise rates alongside economic recovery and growth in Canada, being careful not to make any sudden moves that could trigger a recession. The March increase certainly wasn’t a one-off. In itself, the raise we saw from 0.25 per cent to 0.50 per cent doesn’t have a huge impact on the market, but it wasn’t meant to solve the housing crisis in one shot. This was just the first step of many to attempt to balance the housing market without disrupting economic growth. For variable rate mortgage holders, you should expect to see a few increases to your mortgage rates and payments this year.
Comparing variable and fixed rates
If you’re new to the world of mortgages, it’s important to make sure you understand the difference between variable and fixed rate mortgages. As we mentioned above, variable rates are adjustable and they change when the overnight and prime rates change. Meanwhile, fixed rates don’t change even when these rates vary. Variable rates are more flexible, with fewer penalties to break or change mortgage terms, but they are also more unpredictable. Fixed rates, conversely, are rigid and the penalties can be harsh for breaking terms, but they offer more predictability. Which rate is the right choice right now?
We tend to favour variable rates for most of our borrowers. This isn’t the case 100 per cent of the time, because every situation and every borrower is unique, but in general, we like to recommend variable rates. Like we mentioned, variable rates are much more flexible. Should your mortgage needs change and you need to refinance, the penalty for doing so won’t be as costly as with a fixed rate. This is significant, because it’s common for our mortgage needs to evolve, and it’s nice to have the freedom to make the required adjustments. This flexibility also means you usually have prepayment options to pay off your mortgage faster and save money on interest. Right now, variable rates are also lower than fixed rates, and they will remain so for several more rate increases.
Speaking of refinancing, is this a good move for current home owners? Since interest rates are still quite low, it is still a good time for many home owners to refinance their mortgage. Refinancing could bring you closer to today’s mortgage rates, and you can access your existing home equity if you want to take on projects like home renovations or debt consolidation. If you have a lot of equity built up in your home, it may be a good time to access it. Keep in mind that refinancing doesn’t mean you will automatically qualify for the absolute lowest rate available. The best and lowest mortgage rates are granted to the most reliable, creditworthy borrowers.
Interest and mortgage rates are complex topics, and there’s certainly a lot to keep in mind if you’re a borrower. That’s why we recommend using a mortgage broker to help you understand your options and needs! We can guide you through the mortgage process, find the right lender for you, answer any questions you may have, and help you secure the perfect mortgage path.
If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.