The Bank of Canada predicts this is the year its key lending rate will ascend off record lows. But knowing that doesn’t tell you much if you’re trying to pick a mortgage term. Here are some things to know based on today’s forecast.
The Latest Rate Forecast
Mortgage rates are expected to rise and many are waiting for the Bank of Canada to make their announcement on March 2, 2022. The pandemic has made things unpredictable and is definitely not making it easy for anybody. BUT, the good news is that MonsterMortgage.ca will tell you what the banks don’t and give you a peace of mind.
What Kind of Borrower Are You?
When hunting for a new mortgage, knowing where we’re at in the rate cycle is just one piece of the puzzle. Just as important is your personal balance sheet and stomach for rate volatility.
The market’s rate outlook, if it pans out, implies a small edge for five-year fixed rates, based on interest cost alone. That assumes that no Bank of Canada rate cuts for five years and the mortgage is held with no prepayment penalties in five years.
A five-year fixed makes sense for most long-term borrowers with less established finances. It also insures against the small but real risk that inflation is being drastically underestimated.
It’s counterintuitive to float your rate when “everyone knows” rates are headed up. But an upfront rate advantage of 130 bps (versus five-year fixed rates) makes variables sensible for the right borrower. That’s especially true if you can afford to bet that higher rates will rapidly slow the economy. That could trigger rate cuts as early as three to four years from now, potentially resulting in variable rates having a lower average five-year borrowing cost.
Proponents also cite variable rates’ penalty advantage. Most floating rates guarantee you’ll pay just three months’ interest to break your mortgage early, versus the much worse interest rate differential (IRD) penalties associated with long-term fixed mortgages. But given how penalties are calculated, rising rates considerably reduce the chance you’ll pay an IRD penalty at a fixed rate. Hence, penalties don’t overly concern me at this point in the cycle, especially if you choose a fair-penalty lender (one that doesn’t inflate its penalties like the big banks).
Hybrid mortgages – mortgages that combine a fixed and variable rate – are the most underrated mortgages products in the country. They’re an exceptional way to diversify rate risk given no one can outsmart the market and know where rates will end up. As we speak, you can still find hybrid mortgages near 2 per cent.
Cash flow is king for traditional property investors. One can significantly reduce cash flow risk by locking into a long-term fixed rate with a 30-year amortization. You’ll want to ensure however, that you choose a term length that’s less than or equal to your property holding time frame – to avoid penalties.
This includes property flippers and anyone needing a mortgage renewal on a shorter-term real estate holding. If you’re in this boat, you want the lowest overall borrowing cost you can readily qualify for, including fees. And the last thing you want is to pay a prepayment penalty. Floating rates make sense if you qualify for bank rates and will own the property for at least six to nine months. Otherwise, you’d do well in the cheapest short-term open mortgage you can find.
That said, assuming you don’t have a big line of credit to tap, it often makes sense to pay up for flexibility.
This sort of financing might cost at least three to four percentage points more than a traditional mortgage, but it affords the investor fast, stress-free and tax-deductible financing with a low payment and no prepayment charges. Mortgage brokers are the best source for this kind of financing.
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