Interesting developments could be ahead on a prominent debate in the industry
The Bank of Canada’s next policy rate announcement, scheduled for Wednesday (July 13), is expected to see another oversized hike to its trendsetting interest rate – with a seeming consensus emerging that a 75-basis-point hike is likely.
That move, which would mirror a similar measure taken by the US Federal Reserve in June, would represent the single largest rate increase made by the Bank in 2022 and mark yet another step in the end of the record-low-rate environment that prevailed for the first two years of the COVID-19 pandemic.
It would also see variable-rate mortgage holders contend with another increase to their monthly payments in a trend that could have some interesting portents for the fixed-vs-variable question among homeowners and would-be buyers.
A 0.75% rate hike would see monthly payments increase by roughly $40 per $100,000 owed, according to RATESDOTCA expert and licensed mortgage agent Sung Lee (pictured top). That would mean an extra $200 on a mortgage size of $500,000, for instance, on top of the rate increases that have already taken place this year.
“For variable- or adjustable-rate holders, this isn’t the first time that they’ve had to make some sort of adjustment to their overall budget,” Lee told Canadian Mortgage Professional. “It definitely is adding up, and for those individuals that took variable but had pretty decent room for any kind of upward movement, I think they will start to feel the pinch.”
Read next: Variable vs. fixed – which rate has the upper hand?
After the Bank of Canada slashed its benchmark rate to 0.25% in response to the outbreak of the COVID-19 crisis, the popularity of variable-rate mortgages surged. Canada Mortgage and Housing Corporation (CMHC) said in its recently released Residential Mortgage Industry Report that 53% of Canadians opted for variable terms in the second half of 2021, an increase of 19% over the first six months of the year.
Variable rates are likely to remain a popular option even in the case of a 75-basis-point increase to the Bank rate – but some Canadians could also be taking another look at fixed rates even though they’re still much higher than variable options, Lee suggested.
“For those that were assuming the variable rates would stay lower for longer, they may want to consider what the fixed options are, if they want to convert,” he said. “Without really knowing where or how high the Bank of Canada’s going to go, there is a case to consider a fixed rate mortgage.
“The fact that [variable holders] had to make several budget adjustments throughout the course of the year, for someone to think about this happening potentially several more times over the short term – if that has them panicking, then converting it to a fixed and having just kind of a one-shot payment increase and being able to keep that for the next several years, if that helps them alleviate some of the stress, it might be worth considering.”
Another option for borrowers hoping to free up some cash flow might be speaking to their financial institution and exploring the options for stretching out their amortization. That’s not always the best choice, Lee cautioned, because most homeowners’ goal is to pay off their mortgage rather than extend it.
Read next: Variable rate mortgages in Canada – what will happen in 2022?
“But if someone is stretched so thin and if they’re at the risk of default, it might be worth considering that option, more of a temporary solution,” he added. “And then as rates start to turn the other way, they can still keep their payment where it is and then they’ll be able to shorten the amortization again.”
Flexibility and adaptability could be the name of the game for mortgage holders, particularly considering that rates rise and fall cyclically. Indeed, a new RBC report indicated that when inflation cools, rate hikes are likely to reverse – something that borrowers should be attuned to, according to Lee.
“One consideration could be if someone does want the stability, they could go with a shorter-term option, [for instance] a one- to three-year term on the fixed,” he said. “If there are some discounts out there, that might be a good solution so that when rates eventually do come down, then they can take advantage of going back to variable.”
With bond yields having recently dipped, that may provide room for some lenders to offer specials around the fixed rate to minimize the spread and create a more compelling offer – particularly considering other rumblings about variable-rate discounts shrinking. “The case for fixed rates might be a little bit more prevalent in the next little while,” he said.
