The announcement was good news for variable rate holders on the surface – but changes are coming, warns expert
The Bank of Canada surprised some observers in its opening benchmark rate announcement of the year by opting to leave the rate untouched instead of introducing the first hike of the pandemic era.
That statement saw the Bank hold its key policy rate steady at 0.25% – despite speculation in the weeks prior that it would respond to growing inflation concerns by announcing the first of several quarter-point increases expected to take place this year.
On paper, the benchmark rate remaining unchanged was good news for variable-rate mortgage holders, who will see no rise in their rate payments for at least another several weeks.
Still, with a rate hike in March now viewed as all but inevitable, one mortgage expert believes that now is the time for variable-rate holders, and those currently in the market, to reassess their options and decide whether they might be better served with another product type.
“I’m sure this was very welcome news for many borrowers with variable-rate options, that the rate remained unchanged,” Sung Lee (pictured), RATESDOTCA expert and director, sales and underwriting at IntelliMortgage Inc., told Canadian Mortgage Professional.
“But they should really use this as a window of opportunity to revisit their finances and get things in order, because the stage has been set that there are going to be increases as early as six weeks from now, in March.”
Read more: Bank of Canada makes benchmark rate announcement
As the Bank slashed its benchmark rate to a rock-bottom 0.25% when the COVID-19 pandemic first gripped the country, variable rate mortgages witnessed a surge in popularity, with a RATESDOTCA study released last October finding that interest in the products saw a 147% year over year surge in Canada.
That survey showed that in October 2021, around 32% of mortgage hunters first checked quotes on variable-rate products – up from a mere 13% a year earlier.
Still, while mortgage holders are stress tested when they first apply for a mortgage, Lee pointed out that a lot could have changed between that time and now for variable customers – meaning that it could be a good idea for borrowers to conduct their own updated test to see if they would face a significant negative impact from impending rate hikes.
With consumer price inflation (CPI) currently ballooning in Canada, the Bank now has a narrower timeframe to introduce the necessary rate hikes, according to Lee.
“I think not increasing [the policy rate] does put them on a tighter timeline to get inflation in check,” he said. “I think there are going to be multiple increases, and probably within a shorter timeframe now that January stayed still.
“The increases are necessary, because by leaving the overnight rate unchanged, the Bank of Canada left the door open for home prices to continue to soar even further out of reach for many Canadians.”
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With that in mind, Lee urged brokers to focus on the comfort level and overall risk tolerance of the client, even with some variable rates currently hovering below 1%.
The possibility of gradual rate increases rising above a full percentage point could make clients’ mortgage bill an extra few thousand dollars heavier per year, he said – meaning it’s vital to have a full and detailed discussion with clients on the amount of risk they’d be able to stomach.
“By having that conversation with the client, then you can find out whether the variable rate is the right option. If that’s something that’s going to concern them, and not let them sleep at night, then fixed rate options are definitely something they should consider,” he said.
“It’s more important than ever. It’s essential for clients to really speak with the mortgage professional [who can] read through the headlines and explain to them how it will impact them.”
An early trend many brokers have identified as a potentially big one in 2022 is a refinancing boom, with house prices continuing to soar and a historic lack of supply pervading the Canadian housing market.
Lee said that he anticipated those factors contributing to a healthy refinancing business throughout the year. “With everyone stuck at home, that’s had a lot of people look at taking out equity to renovate their homes, and maybe look for an investment property. So I think we’ll continue to see an uptick in refinances.”
