After a series of exponential rate hikes, the Bank of Canada increased its overnight lending rate for a fifth time this year, by 75 basis points on Wednesday morning, bringing the rate to 3.25% — a small source of relief from July’s 100-basis-point hike.
Although inflation dropped for the first time since June 2020 to 7.6% in July from 8.1% — the highest it’s been in almost 40 years — the Bank’s core measures of inflation have moved up, ranging between 5% and 5.5%. And there continues to be a risk of elevated inflation becoming entrenched.
Apart from declining gas prices, the cost of food and other living expenses have continued to rise, and the ongoing war in Ukraine, supply disruptions, and COVID-19 outbreaks are largely to blame. As a result, the Bank says that rates will need to rise further. “As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target."
For homeowners and buyers, today’s rate hike is bound to be concerning. According to a Manulife Bank of Canada survey conducted in April, nearly one-in-four Canadians said they’d be forced to sell their home if interest rates continued to rise. By now, many may have already faced that reality. And with so much uncertainty as to when rates will stabilize, many Canadians are left without answers.
To shed more light on the mortgage implications of the Bank’s latest rate decision, we turned to Toronto-based mortgage broker Sung Lee so that you can better navigate the decision-making process when refinancing, renewing, or shopping for a mortgage in today’s rate environment.
What will it take for the BoC to stop raising rates?
The reason for these rate hikes is to combat record high inflation. We can expect the Bank to pause once we see clear signals that these increases are indeed working and inflation numbers begin to come down. The good news is that we've seen inflation ease from 8.1% in June to 7.6% in July. If this downward trend continues, it will provide a strong case to stop the aggressive hikes.
Are fixed rates near their peak?
This is a tough question since no one really knows where the peak is. We have seen some significant increases in the past 12 months and we'd like to believe we are nearing the peak. There is likely some additional upside of 1-2% in the short to mid term. This will largely depend on the market’s view on where inflation is headed and risk of a looming recession.
Will variable rates eventually surpass fixed rates?
Variable rates surpassing fixed rates is unlikely; however, if they did it would only be temporary. Fixed rates are generally priced higher than variable rates for the additional certainty they provide.
Can I refinance my mortgage early, before my term is up?
In most cases — yes (with the exception of the most restrictive mortgage products). Switching lenders to take advantage of lower rates during the term will trigger a penalty. For variable rate mortgages, this means three months' worth of interest. For fixed rate mortgages, it's the higher of three months interest or the interest rate differential.
Paying the penalty could still be worth it as long as the new interest rate provides enough savings. You can also refinance with your existing lender through a "blend and extend" to avoid paying a penalty. This means blending your existing mortgage rate with the new mortgage rate offered and extending out the term.
What should I do if my mortgage renewal date is coming up at the beginning of 2023? Should I shop around now and try to secure a better rate?
Shopping early is always recommended. Most lenders will hold your rate up to 120 days, which will take you into January 2023. I would suggest working with a broker who has access to a wide array of lenders and compare against what your current lender is offering you.
Is it better to lock in a shorter mortgage term now since rates are going up for the next two to three years?
For those looking for a fixed rate and who believe rates will turn the corner in the next couple of years, it may be worth considering a shorter-term fixed rate mortgage. This would provide some stability in the near term and allow them to take advantage of potentially lower rates at renewal. This strategy does come with some risks as no one really knows when rates will reverse.
Variable rates are mostly five-year terms with a few lenders offering three years. Five-year terms usually offer the most competitive rates. An experienced mortgage professional would be able to help run some calculations and hypothetical scenarios to help you make a better-informed decision.
Would you recommend a fixed or variable rate structure for those getting a mortgage right now?
Choosing fixed versus variable is a personal decision driven by budget and risk tolerance. If you have some flexibility in your budget and can handle some ups and downs in order to try and save on interest cost (as history has shown), a variable rate might be the answer. If the thought of your rate and payments going up make you queasy or keeps you up at night, paying a premium for a fixed rate may not be so bad.
Will rising interest rates affect the closing costs of buying a home?
Closing costs range from 1.5-3% of your home's purchase price. This includes things such as legal fees, land transfer tax, appraisals, inspections, property tax adjustments etc. Rising interest rates do not have a direct impact on this unless you are borrowing from a line of credit to fund some of these costs.
What are your tips for finding a good deal on mortgage?
Shopping around is essential to getting a good deal on a mortgage. This includes browsing some online rate comparison sites and working with a broker who works with a large number of lenders. There are also a number of digital brokerages who are willing to provide a further discount since they focus on high volume and less margin. Gone are the days of only speaking to your own bank. You want to arm yourself with knowledge and information since this is the largest debt you'll likely ever take on.
Any additional comments?
Buying a home, renewing a mortgage, or refinancing a mortgage today is more stressful than ever. There is a lot of noise around interest rates and affordability leaving many confused and unsure if they are making the right decision.
While there is a wealth of information online, I encourage consumers to work with a trusted mortgage professional to navigate through these uncertain times. Their services are mostly free, and their goal is to understand your own personal situation and to provide you with the best mortgage product and rate that you qualify for.
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