The Bank of Canada today announced that it’s holding steady on it’s overnight lending rate at 1.25%, which means that, accordingly, bank prime rates will remain as they are, generally at 2.45% (excepting TD, whose prime rate is 2.60%). Meeting approximately every six weeks, the Bank of Canada evaluates the current market conditions and outlook going forward so as to adjust the cost of borrowing for Canadians and Canadian corporations in order to keep inflation at a steady target, usually in or around 2%.
In their release today, the Bank of Canada indicated that that inflation has been very near that target, but has recently been driven largely by increases in gasoline prices – of which so many of us are all too aware. However, other areas, such as resale housing activity and global business development have lagged a bit behind expected targets, the latter due to uncertainty about trade policies, particular US polices as they pertain to NAFTA, as well as specific industries such as steel. That said, the Bank of Canada also did indicate that “higher interest rates will be warranted to keep inflation near target” in the future, so while they’ve held now, there’s a very real possibility of another increase in the overnight lending rate before too long, possibly as early as July 11th when they next meet.
So – what does all this mean for someone getting a mortgage?
Ultimately, the choice between a ‘fixed’ rate and a ‘variable’ or ‘adjustable’ rate is one which is unique in an individual circumstance; what is good for one potential mortgagee might not be good for another. Individual financial stability, future plans, risk tolerance, and the size of mortgage can all affect the decision. There is not necessarily one right answer, and it’s important to have an informed discussion as it pertains to you directly.
That said, there is currently a fairly significant gap between variable and fixed rates. On an insured basis (that is, someone purchasing with 5% to 15% down payment), prevailing fixed rates are currently around 3.44% for 5 years; current variable rates are currently around Prime-minus-1% (P-1.00%), which yields a current rate of 2.45%. While it’s difficult to project outward over the next 5 years to determine which would be cheaper, that 0.99% head start that the variable rates offer is a compelling one for many homebuyers. Rates generally go up or down in 0.25% increments, meaning it’d take four increases just for the two to break even; even then, because of the head start, the variable would win out over the long term. There would have to be in excess of 8 increases over 5 years before it’s likely the fixed rate would win out in overall cost over the period. But, there’s also value for many clients in the cost-certainty of a fixed rate.
If you’ve got questions about which is right for you, and to engage in intelligent planning in the homebuying process, we’d be more than glad to take the time to help you reach the decisions that are right for you.