Fixed Rates May Be on the Rise. Should You Act Now?
Updated: Oct 28, 2020
Are you in a variable mortgage? If you're considering locking into a fixed rate, this could be a good time to explore your options.
Adjustments to Quantitative Easing
This week the Bank of Canada (BoC) pulls back on key economic support programs, called quantitative easing (QE). This includes the Canada Mortgage Bond Purchase Program (CMBP). As the graph shows, it's invested billions since March.
Billions in CMB purchases achieved two major objectives:
It pumped a ton of money into the economy, fast.
It artificially suppressed interest rates.
During a crisis, money becomes scarce and expensive (just like toilet paper). Investors typically sell off riskier investments and hoard cash until the future looks more certain. For example, some private lenders stopped doing mortgages completely in Q2. Activity like this can cause borrowing rates to go up.
Buying CMB was one way for the BoC to ensure consumers and businesses could continue to access funds needed to invest, borrow, and pay bills with confidence, during great uncertainty.
Why the Bank of Canada is Making Changes Now
Even the BoC cannot "print money" forever. At some point the risk of potential side effects (like inflation) starts to outweigh the benefits.
Six months into the pandemic:
mortgage rates have plummeted
household income has actually increased despite job losses (due to government supports)
real estate values are up nationwide, in some places by double digits
Although some industries are doing better than others, many worst-case scenario predictions have not come to pass. The BoC is reevaluating how it will continue to support liquidity levels moving forward, and the CMBP Program ends the week of October 26th.
What This Means for Interest Rates
Mortgage rates are currently at historic lows, with all lenders and for all types of loans, in no small part because the BoC has been inflating the money supply and suppressing interest rates.
How will markets react to BoC program changes? If fixed mortgage rates increase, pre-pandemic bond yields suggest they could go up by 0.25-0.50. For every $100,000 borrowed that's about a $10-$20 difference in the monthly payment.
If your mortgage is already fixed your payments won't change. But if you want to lock into a fixed rate, now could be a good time to explore your options. For example, if you have a variable rate mortgage, many lenders will let you convert from variable to fixed without penalty. This can also work for a home equity line of credit (HELOC).
There is no guarantee fixed rates will increase, and they also come with certain restrictions, so it's important to discuss the pros and cons of locking in with a professional.
If you have a variable rate mortgage or HELOC your interest rate and payments are likely to remain as-is. Unlike fixed rates, floating rates are primarily dependant on the overnight rate set by the BoC, which was quickly lowered from 1.75% to 0.25% at the start of the pandemic. As the first line of the table shows, that's not forecast to change.
A Long Road Ahead
The conclusion of major BoC programs could be interpreted as a signal, for the beginning of the end. However that "end" is likely years away.
The BoC has repeatedly stressed two things:
Recovery will be uneven - a long, bumpy road - and take at least two years.
Interest rates will remain low for a long time. BoC Governor Tiff Macklem delivered this strong message on July 15.
The BoC will continue to monitor economic conditions and make adjustments as needed. If conditions change, "any discontinued facilities can be restarted if necessary."
What Should You Do?
Book a call with me here to get your free mortgage check-up. I work with over 60 lenders to find you the best terms, and there's no obligation.
Even if you weren't considering making changes to your mortgage, this could be a good time to review your options.
Thanks for reading and stay safe.