Which path to choose for your mortgage

The Bank of Canada stood pat in its benchmark for the overnight rate in late May, opting to hold it at 1.25 per cent – but hinted that future rate increases are in the offing.

So, what does that mean for homebuyers who are currently grappling with whether to choose fixed or variable rates? (The Bank of Canada’s overnight rate is one of the major factors banks use when setting their own prime rates, which are tied to variable rates.)

The Bank of Canada’s rates

First, let’s take a look at what is guiding the Bank of Canada when it comes to deciding the future of its overnight rate.

“The Bank of Canada assessed the housing industry as ‘soft’ as a result of the B-20 stress test and increasing interest rates,” says James Laird, president of CanWise Financial. “The Bank expects housing activity to pick up; however, if it doesn’t, housing will be a strong moderating factor in delaying future interest rate hikes. It is apparent that the Bank of Canada has some concern about activity in the housing market, and they’re going to keep a close eye on the stabilization of the market as they determine future interest rate policy.”

However, the Bank of Canada has indicated it believes housing market activity will pick up and continue to be a main economic driver – hinting there will be at least one rate hike before the end of the year.

“Governing Council will take a gradual approach to policy adjustments, guided by incoming data. In particular, the Bank will continue to assess the economy’s sensitivity to interest rate movements and the evolution of economic capacity,” the Bank said following its latest rate policy announcement.

Laird predicts two possible rate increases by the end of the year.

Fixed or variable rates?

So, how is that expected to impact mortgage affordability? And how will it impact a homebuyer’s decision when choosing between fixed or variable rate mortgages?

The truth is that, even with two potential rate hikes to come, variable rates may continue to be the more affordable option. Of course, every person’s situation is different; so, it’s best to chat with a mortgage broker when choosing the best mortgage and helping you answer the question: “How much house can I afford?”

“This announcement should provide reassurance to those currently in variable rates that rate increases will be both moderate and gradual,” Laird says. “Those currently choosing between variable and fixed should consider the savings offered by variable rates, as the spread between fixed and variable rates remains at a seven-year high.”

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