"Rate Hikes Will End Soon"

Happy November everyone! I hope and trust you had a great Halloween and October with your family, friends and loved ones. I was able to hand out some candy with my daughter Serena to the children in my neighbourhood and always enjoy seeing the creative costumes that kids come up with. It was so great to see so many smiling faces after a few years of uncertain and challenging times.

When it comes to mortgages and rates, those uncertain times still very much remain. We recently saw the Bank of Canada (BoC) increase the overnight lending rate by 50 basis points (.50%) which prompted most mortgage lenders to increase their prime lending rate to 5.95% and in some cases as high as 6.10%. This means for anyone who is in a variable rate mortgage, you will be seeing your rate increase again in the coming days and in turn, payments will also increase. I should explain that there are two different types of variable rate products lenders offer: There is a true variable rate product which is provided by TD Bank, which keeps your payment the same month to month even as rates change. The percentage of your payments that goes towards principal and interest, however, adjusts accordingly up or down.? The second type of variable rate is what’s called an adjustable rate mortgage or “ARM”. This type of variable rate mortgage actually increases or decreases your monthly payment as rates change. The principal payment will always remain the same which can make it easier to gauge how much of your mortgage you will pay down over the term, but the amount of interest taken will increase or decrease with rate changes which will directly impact your monthly payment amount throughout your term. Variable rate mortgage holders will see their payments increase in the short term or be forced to increase them manually as their trigger rate is hit. A trigger rate is the interest rate at which you are no longer paying any money towards your mortgage principal and are only paying off the bank's interest. A lender like TD who offers a true variable rate product would have a trigger rate.?

In an article released this week by Canadian Mortgage Trends, central bank’s Governor, Tiff Macklem, in his opening remarks to the Senate committee on banking, said “This tightening phase will draw to a close,” “We are getting closer, but we are not there yet.”.?

Macklem says that there is still some work needed in order to bring inflation back to its target of two percent. “The Bank of Canada’s job is to ensure inflation is low, stable and predictable,” he told the committee. “We are still far from that goal. We view the risks around our forecast for inflation to be reasonably balanced. But with inflation so far above our target, we are particularly concerned about the upside risks.”

According to the BoC’s latest forecasts unveiled in its October Monetary Policy Report, the Bank expects headline inflation to average 6.9% in 2022 before falling to 4.1% in 2023 and 2.2% in 2024. My assumption would be that once inflation drops to these levels as they predict, we will see interest rates lower as well to help stimulate the economy.?

The people this will be most challenging for in the short term are those existing mortgage holders who are up for renewal in the coming 12 months. With the uncertainty of interest rates and the real estate market as a whole, it’s a tough decision to make as to which rate option is best suited for you and your family. My advice would be to contact your Mortgage Broker (me) or bank if you are in this position to ensure you are reviewing all of the options available to you. My suggestion in the short term would be to either go forward with a variable rate option knowing that the product itself is more favourable for borrowers as it’s more flexible for breaking and also will automatically fluctuate down as rates decrease again in the coming 5 years OR select a shorter term fixed option in the 2-3 year range. This will allow you to lock in for a lower time frame than 5 years and hopefully benefit on your next renewal from the lowered interest rates in 2024-2025.?

As always, no one has a crystal ball to see the future, but these are key elements and takeaways from my 15+ years in the industry and analyzing the markets. Please feel free at any time to book a time with me to chat and be sure to check out my weekly podcast “The Ottawa Real Estate Podcast” for all the latest on what’s happening in Ottawa and the real estate market across Canada.?

-Paul S