If your mortgage is coming up for renewal and you are experiencing a bit of “rate shock,” you are not alone!
If you currently have a fixed-rate mortgage, your interest rate will most likely be going up, and likely substantially, depending on your term. If you currently have a variable-rate mortgage, your interest rate has been steadily increasing over the past year, so it’s probably no surprise. As Grimsby mortgage brokers, we see and hear about it daily and we understand your pain.
What’s happening with mortgage rates?
In hindsight, we know that interest rates have been steadily increasing; what we don’t know is whether they will increase any further and if so, by how much. We also don’t know how long they will stay at elevated levels, when they will begin coming back down and how far they will come down.
Up until early 2022, interest rates have trended downward over the past couple of decades. During this period, in hindsight, variable rates have proven to be a fantastic option, with Prime being at relatively reasonable levels and trending downward, coupled with generous discounts off of Prime—how could you go wrong?
In a nutshell, what went wrong was a rapid increase in inflation following the pandemic, which resulted in the Bank of Canada increasing the Prime rate in an attempt to slow the economy and tame inflation.
What will happen in the future with mortgage interest rates?
So, how long will they stay high?
Well, everything being equal, they will remain at elevated levels until inflation is deemed to be back under control. When this will occur is impossible to accurately predict; it’s more of an educated guess at best, and a total “shot in the dark” at worst.
As an experienced Grimsby mortgage broker, I can only give you my best guess.
Our best guess is that inflation should come down to more manageable levels during the course of 2024, which should allow rates to level out at least. However, the Bank of Canada will be unlikely to start lowering rates significantly until 2025 or 2026 at the earliest, for fear of stoking inflationary pressure by dropping rates too soon and by too much.
So do we choose a variable or fixed-rate mortgage now?
So, at this point, I may have actually made you more uncertain as to which term to go with at renewal time, whether to go with a variable rate, hoping that rates will come down sooner than later, or lock into a five-year term, because it is currently the lowest rate option available.
With variable rates currently having the highest effective interest rates, with the potential to go even higher, at one end of the spectrum, and five-year fixed terms having the lowest rate at the other end of the spectrum, I am currently advising clients to consider a “medium-term” mortgage such as a three- or four-year term. The interest rates on a three- or four-year term are substantially lower than those of a variable rate mortgage, while only slightly higher than those of a five-year term. At the same time, and possibly more importantly, the shorter term should provide the opportunity to potentially take advantage of lower future rates in the “midterm,” assuming that rates will have declined once your mortgage is up for renewal again.
If your mortgage is renewing this year, make sure to reach out to your Grimsby Mortgage Broker for a Free Consultation to get a second opinion as to whether you should choose a variable or fixed-rate mortgage. As always, our advice is free yet extremely valuable.