If you have a variable rate mortgage, you would have had about three increases in your mortgage payment over the last year. You may be wondering if now is the best time would be to switch your mortgage to a 5 year fixed rate mortgage.

The Bank of Canada has increased its overnight rate which is currently at 1.75%. between July 12th, 2017 and December 5th, 2018 that rate has increased from 0.75% to 1.75%. The 5 year fixed rate mortgage.

The overnight lending rate is the rate that banks lend and borrow money from each other. Any change in this rate will affect the commercial banks short-term lending rate i.e. consumer loans and variable rate mortgages.

variable rate mortgage

Prime rate

Commercial banks set their prime interest rate based on the overnight lending rate. The current prime rate is 3.95% and they lend to their best client at a discount of that rate. The current variable rate is 2.85%.  Compared to that the current 5-year fixed rate mortgage is 3.49%.

It would take another two additional hikes for the variable rate to hit that mark.  Also, please note that if you switch to a 5-year fixed rate the lowest rate you would get (depending on the value of your house or if your current mortgage is insured or not) would be 3.49%. The rate could be higher.

Buying a home is probably the largest investment most people will make in their lifetime and the cost of a mortgage can be expensive. The difference between a fixed rate mortgage and a variable rate mortgage could be tens of thousands in your pocket instead of your bank.

Understanding why the Bank of Canada increase or reduce the rate banks lend and borrow from each other could save you a lot of money. One thing to note is that historically borrowers save more with a variable rate mortgage.

Interest Rate and Gasoline

Let’s say the Bank of Canada to a car and compare interest rates to gasoline. The interest rate is the fuel that drives the economy. If you give the economy or the car too much as you could lose control and have an accident (inflation). Give it too little and the car won’t move (stagnation). The Bank of Canada must give the economy just enough fuel for a smooth and comfortable ride.

As a driver you must contend with many distractions, dangers, stop sign, stop lights, uneven road and so many other things that could make them lose control of the car. Some of those things are internal and some are external that the driver has no control over.  As a driver may be driving on a strip of road that is clear and visible and suddenly, the cloud shifts and you are blinded by the sun. Without thinking immediately apply your brakes stopping the flow of gasoline and everyone in the car is jolted by the unexpected stop or deceleration.

What cause variable rate changes

Similarly, the Canadian economy is affected by external forces, geopolitical events, the price of oil on the world market among other things. Today, the main ones are Brexit (Britain’s impending exit from the Eurozone). The detention of Meng Wanzhou, the CFO of Huawei here in Canada, and the Canadian government being used as a pawn in this US/China trade war.

The fact that China might be upset with Canada could have a long-lasting effect on our economy and thus short-term interest rates. Internally, the monthly employment report, real estate sales report, Statistics Canada monthly inflation (consumer spending habits), the price Canadian oil companies get for their oil and the amount of revenue the Canadian government is expected to get among other things.

On October 24th, when the B o C increased rates by 0.25% after a new NAFTA agreement was eminent most economist thought that with that uncertainty out of the way they could predict the advent of more rates. Unfortunately, global issues have taken a turn for the worse and fortunately for holders of variable rate mortgages the Bank of Canada did not increase their overnight interest rate.

Contrary to six weeks ago when I thought the Bank of Canada would be applying the gas and increasing interest rates, a few geopolitical events have happened and in my opinion, some things will have to be settled for rates to move up.

If you have a variable rate mortgage it might be a good idea to contact to figure out what your existing discount is and if you could save with the discounts being offered today.

If you have a 5-year fixed rate mortgage it would also be a wise idea to review your mortgage and see if any savings are available to you. Contact us at www.sunlitemortgage.com  to see if we can assist you.

 

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