It happened! Rates are on the move...

Change is Afoot

After years of trying to be clever in delivering the same message, there is finally something new to say: The Bank of Canada (BoC) raised their overnight rate by 0.25% to 0.5%. But rather than re-hash a lot of the same messaging you've seen from me or other sources, I'll give a very brief summary of the why and spend more time on that what - as in "what should you do?".

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The Why

In short, the Bank of Canada had to raise rates. Inflation is higher than what we're used to and they need to manage expectations looking forward. This decision was teed up in January with the change in their dialogue and I think it's fair to expect another 0.25% increase at their next meeting on April 13th. Though the BoC's primary responsibility is to keep inflation in target range, they're in for some tough sledding. Energy costs are high and getting higher now with the conflict in the Ukraine. Commodities are in the same boat and supply chain issues are slow to resolve. Raising interest rates will help lower inflation expectations but in reality, it will do little to curb higher fuel and energy costs that spill over into pretty much every aspect of our budgets. 

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The What

If you're in a variable rate mortgage or line of credit your bank will be raising their rates to stay in line with the BoC's decision. That means one of two things will happen:

1. Your total payment will increase to reflect the higher rate, or,
2. If you're in a capped payment product such as a TD variable, the proportion of your payment that goes to interest will increase and slow the pace of how quickly your mortgage gets repaid

The #1 question I have gotten all year so far (and roughly infinity times today) is "is it time to convert to a fixed rate?!". To that I would say "no". And here's why:

• We knew this day was coming when we compared fixed and variable rates - variable was always going to rise so this has already been factored in
• Variable rates are much more flexible than fixed and given the average mortgage holder will break their mortgage at ~3.5 years, there is value in the flexibility over a fixed rate
• With 5 year fixed rates currently between 2.89% and 3.19% there is still a lot of room for further increases before a fixed rate makes sense. If you're in a variable at ~1.7% or better even after today's increase, you still have 5 more rate increases before you're at current fixed rate levels

Some Numbers

If you're in a variable rate mortgage, your payment is now set to increase by ~$12/month for every $100,000 you owe. On a $500,000 mortgage, you'll to see a payment increase of $60/month. But going forward, we can expect to see further rate jumps. And what you believe will happen over the next two years will dictate which path you should take: convert to a fixed or ride out the variable. I've run out a comparison with that in mind to help simplify your decision making (all of this is based off the same $500,000 mortgage amortized over a 25 year term):

1. If you think variable rates will further increase by 1.75% or less over the next 24 months, you should stay variable.
2. If you think variable rates will increase by more than 1.75% over the next 24 months, you should convert to a fixed rate.

My belief is that variable rates will rise by less than 1.75% over the next two years. If you have followed my previous emails, you'll have a good understanding but in short, I believe this for the following reasons:

1. Debt loads have increased over the last 14+ years of low rates and increases to the overnight rate will be felt more strongly than they ever have
2. Inflation is being driven, at least in part, by factors that higher interest rates won't impact. Higher energy costs and broken supply chains won't be significantly impacted by higher interest rates
3. If I'm right on point #2, higher interest rates and higher inflation hit Canadians with a double-whammy of increases: increased debt-servicing costs and increased strain on their spending budgets
4. Immigration numbers should help to offset significant wage increases that would further entrench inflation

You know, I never intend for these to be this long but there is always so much to unpack and information to provide. But if you find yourself with more questions and want to discuss your mortgage or questions in detail, please reach out! We're always happy to help. And if you know anyone that would find this useful, as always, please pass it on.