NEWS

The Canadian Inflation Rate was showing as 8.1% recently which is the highest it has been since 1983. The Bank of Canada has been tackling this issue through several rate hikes, since March 2022. The rise of the central bank’s overnight rate has been the focus of battling inflation and slowing the economy. In the meantime, the Bond Market has started to slide down due to growing expectations of an economic downturn.

What does all this have to do with Fixed and Variable Mortgage Rates we all ask?

They have a significant impact on both types of rates and are the foundation of them going in different directions presently. The bond market influences fixed rate mortgages so as the Government of Canada’s 5-Year Bond Yield falls, national mortgage lenders, especially mono-lines, are able to drop their high ratio and insurance interest rates. This has actually occurred the last week as fixed rates have begun to drop below 5%. A decline of roughly 10 basis-points and a bit more within some lender rate promos.

On the other hand, variable rates are tied directly to Prime that is set by what the overnight rate from the central bank sits at. As the Bank of Canada increases the overnight rate, it increases the Prime Rate that variable rates are based on. In conjunction with the increase in the Prime Rate, now at 4.70%, lenders have also backed off their discount percentage from prime in setting their overall variable rate. Not long ago, a borrower could secure a variable mortgage rate of Prime minus one percent or maybe even a bit more. Now, many lenders are offering prime minus .90% or less that could go as low as .75% The result, a variable is now based on a higher prime rate and a lower discount from prime that yields an overall higher rate within an environment where rates are expected to increase again on September 7, 2022 when the Bank of Canada makes its next rate announcement.

At present, it is clear that fixed and variable rates are going in opposite directions so a borrower should keep this in mind if seeking mortgage financing currently. Borrowers should know what their long term goals are regarding their mortgage and also assess their risk tolerance when it comes to rate influx, despite the falling of home prices.

Remember, rates can change extremely quickly, so have a plan going in and discuss it further with your mortgage professional for additional updated information so you can make the best and most educational decision on whether to take a variable or a fixed rate.

Sources: Canadian Mortgage Trends