Fixed Vs. Variable - The Tide Has Turned

Variable Rate Update – Reaching Escape Velocity?

March 9, 2016

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The Bank of Canada (BOC) left the prime rate unchanged today. Though the economic growth is in the lower range of the bank’s 2% target range, the wording of the bank’s announcement suggests that it will wait for previous rate cuts take effect. It’s clear that any increases in prime are off the table since the bank is expecting the economy to grow at 1.5% in 2016 and 2.5% in 2017. Since the BOCs growth target rate is 2%, I would even speculate that 2017 might not see any rate increases.

Fixed Vs Variable – the tide has turnedOver the past month while bond rates have been dropping the big six banks have dramatically pulled back on the variable rate discounts and have gradually increased their fixed rates. Is this just another profit grab from the big banks? The answer is both yes and no. What was lost in December’s headlines announcing increased down payments for purchase priced between $500,000 and $1,000,000, was that come July this year, the banks will be required to set aside more money for mortgage losses as well as increased costs for mortgage securitization programs. Bottom line, it’s going to cost the banks more to fund your mortgage, but not until July. So there isn’t any need to increase mortgage rates now; which answers the yes question about the profit grab. So should you fix your current variable mortgage? No! If your mortgage has a discount of prime minus 0.5% or greater, you are in the perfect position for the next two years. If you are about to get a new mortgage however, the discount to prime is not offsetting the risk of taking a variable rate. Your savings could be eliminated with just one rate increase from the Bank of Canada. Though fixed rates have crept up, I’m anticipating that as the spring real estate market heats up, the usual competitive pressures will cause rates to lower. What we can do in this type of interest rate environment is to manage your pre-approval with several lenders to ensure you get the best rate/product combination.

Key Points From The Bank of Canada Announcement

Prime rate not changed
Inflation remains at the bottom of the BOCs target range
China’s economic slowdown impacting commodity prices
Oil prices to drop further as economic sanctions are lifted from Iran
Canadian manufacturing exports continue to grow due to a weaker dollar

How Your Mortgage Is Impacted

Prime rate remains at 2.7%
Fixed mortgage rates have increased with rates moving up 10bps to 20bps
Variable rate discounts to prime continue to decrease over the past month
Rate holds for purchases or maturities is now available up to the end of May

Wondering how to structure your mortgage for 2016?

Give me a call! We can discuss how your current financial situation fits into today’s economic environment and how the right mortgage strategy could save you thousands of dollars over the term of your mortgage.

The next meeting for the Bank of Canada is March 09, 2016

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Fixed Vs. Variable – The Tide Has Turned

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Fixed Vs. Variable – The Tide Has Turned

Key Points From The Bank of Canada Announcement

How Your Mortgage Is Impacted

Mortgage Rates, Market Shifts, and Missed Opportunities

Making Mortgage Decisions Beyond The Current Noise

Rates Stable, Confidence Returning