The Prime Rate Increasing…Why it’s NOT Time to Panic

First of all, what’s wrong with taking a flyer on a five year mortgage at 2.30%? Or for that matter, a 10 year term at 2.94%?

The Bank of Canada finally signaled that in 2022, the benchmark overnight Bank rate will increase. The move, estimated at 3 increases will move the Bank rate from 0.25% to around 1%. We will be the first developed country in the world to begin this change in monetary policy. The concern is always inflation – too much money chasing too few goods. I remember that – and only that from Economic – 101. Pundits like Robert McLister, Rob Carrick of The Globe and Mail and even CIBC’s Deputy Chief Economist, Ben Tal, have been talking about runaway inflation over the last few months and the impending interest rate disaster that is waiting to happen.

Many Canadians have taken advantage of this low rate environment and have focused on paying down their debt and increasing their savings. The most effective way of doing this is to use a variable rate mortgage. Averaging 1.5% for the past year, they offer flexibility with a simple 3-month interest penalty to break the mortgage.

Is inflation real and here to stay or are these supply chain issues driving up supply and prices in the short run? None of us so-called “experts” know and none of us pay your mortgage. I know what rates are for 120 days because our lenders guarantee that timeline.

Here are a few points that I know from history of mortgage rates in Canada:

1. Historically, these are great fixed rates – never been better.
2. Once the Bank of Canada starts moving up, they generally continue for a few years, not months.
3. Fixed rates move up twice as fast as variable rates. There is generally a 1% to 1.25% spread between the two.
4. If you take a variable rate mortgage, consider increasing your monthly payments by 20%. In other words, use your extra money to pay down principal each month. It’s not fun or exciting, but it will keep more money in your pocket and NOT your bank’s, build up more equity in your home and help you pay your mortgage off faster.

This pandemic has changed the economics of every country and makes predictors look like fools. Use common sense. If your family is on a tight budget, managing interest rate risk with a low cost fixed rate makes perfect sense. Variable rates are enticing and offer flexibility. They are generally well suited for individuals who can handle changes, sometimes significant, to their payments each month.

If you need a sounding board, some great mortgage options or trusted advice, call or email MonsterMortgage.ca today.

Donald Bayer

President, MonsterMortgage.ca