The Bank of Canada recently announced that it will not be changing the target overnight rate. It currently stands at 0.25% and there are no concrete plans to increase it. This is due to a commitment made to not raise the overnight policy rate until pandemic recovery is completed.
However, the Bank of Canada expects that by mid-2022 recovery will be considered complete from an economic perspective. This means the overnight rate may increase at this point. The Bank addressed the high inflation rate (which can often prompt a rate increase) but stated that the inflation rate will likely normalize by the end of 2022.
Nobody besides the policymakers knows anything concrete about when a rate hike might be implemented and how much of an increase it might be. However, the Bank has clearly indicated that a rate increase is on the horizon in 2022.
How does all of this impact your mortgage or your plans to buy a new home? It’s time to explore how you can make sound decisions now to prepare for an increased interest rate.
Have a Variable Rate? Prepare for a Change
Homeowners with variable interest rates should brace themselves for a rate hike by performing a mortgage stress test. This test is essentially using potential new interest rates to calculate your new monthly payment. The purpose is to understand whether or not you will be able to financially withstand an increased interest rate.
Since we don’t know any specifics about the future increase, you will need to use hypothetical numbers to get an idea of what’s possible. Run the numbers for both moderate and extreme changes. Can you fit the new monthly payments in your budget? If not, it might be time to switch to a fixed-rate mortgage.
Is It Time to Secure a Fixed Rate Mortgage?
Existing homeowners and those looking to buy their first home in Toronto should explore what’s possible with a fixed-rate mortgage. Fixed-rate mortgages are higher than variable rates, but they are set in stone. Nothing will change your interest rate, other than refinancing your loan.
Fixed-rate mortgages are perfect for risk-averse homebuyers, but you may end up paying more. Your interest rate may not fluctuate and that creates peace of mind, but you may miss out on savings created by a low variable rate.
Even in the current situation where rate hikes are expected in the near future, the Bank of Canada would need to increase the rate by four to six times before it is equal to the current fixed rate. Rushing to a fixed-rate mortgage to avoid a rate increase may give you a permanent rate hike that’s even higher.
Deciding between a fixed-rate and variable-rate mortgage is a decision every homeowner will have to face, and there is no universally correct answer. Households equipped to potentially have a higher payment may actually save money by taking on a variable rate, while those who want a consistently reliable monthly payment will likely appreciate a fixed-rate mortgage.
It’s worth noting that if you would like to take on a fixed-mortgage loan, it may be ideal to do so sooner rather than later. It’s expected that the fixed-rate environment will steadily increase for the foreseeable future.
How Will You Handle a Possible Rate Hike?
It’s great news that the Bank of Canada will not be raising the overnight rate this year. However, every indication points to a rate hike around mid-2022. Homeowners and prospective homebuyers should be aware of this possible increase and make sound financial decisions now to help prepare them for it.
Do you need help understanding how this news may impact your search for a new home? Book a meeting with me today to learn more.
Hi, I’m Joel, a real estate professional based in Toronto.
My approach is simple—I put you first. I believe in open communication, total transparency, and meaningful results. I’ll guide you through the real estate process, market values, and always keep the focus on you—and your needs.