Interest Rate Update – Fixed or Variable in 2017 ?

The Bank of Canada (BOC) left rates unchanged this morning and also hinted that the prime rate could stay the same until 2019.

Key Points From The Bank of Canada Announcement

• Prime rate not changed
• Global and US economies showing signs of growth
• US almost at full employment
• Canadian exports still weak
• Inflation looking to slow in 2018

How Your Mortgage Is Impacted

• Prime rate remains at 2.7%
• Fixed rates have decreased due to spring market
• Variable mortgage rates expected to stay the same until mid 2019
• Rate holds for purchases or maturities now available until mid August 2017.

Fixed mortgages are 75% impacted economic events outside of Canada and 25% by what’s going on inside of Canada. So as you hear more news about the US economy growing, expect the fixed rates to rise. Even if the Canadian economy is not growing, fixed rates will be impacted since mortgage rates are priced off the bond market, which focuses has more of a global perspective.

Variable Mortgages

Variable rate mortgages on the other hand are 90% impacted by events inside Canada and 10% what’s happening outside our boarders. Variable rates are the opposite to their fixed rate brethren because variable mortgages are tied to the prime rate and the prime rate is the lever which the BOC controls our economy. So the more you hear about slow growth, the better it is for variable mortgages.

Why this is important

It’s important because in today’s announcement the BOC has stated that its expecting the Canadian economy to get left behind by the US and a few other G7 nations. This potentially sets the stage late in the 3rd quarter of 2017 where we could see the bond market price in future economic growth outside of Canada, which would translate into higher fixed mortgage rates. However when it comes to variable rate mortgages the opposite could be true. If the Canadian economy continues with the trend of sputtering growth, prime will continue to stay unchanged, making variable rate mortgages more competitive. To take things a step further, when the lenders feel that the BOC has more of bias towards increasing the prime rate, they will more than likely increase their discounts on their variable rate mortgages. All this sets the stage for variable rate mortgages to potentially outperform fixed rate mortgages for 2017 and 2018.

So to summarize if you have a mortgage that is maturing in the next 4 – 5 months, a bit of planning now could save you a lot of money.