Rate debate continues following central bank's latest decision
The Bank of Canada’s decision to keep interest rates unchanged on Wednesday came as no surprise to the mortgage industry – but it leaves plenty of questions for borrowers weighing up the best choice on interest rates.
The central bank’s announcement kept the policy rate at 2.25%, meaning variable rates and home equity lines of credit (HELOCs) will remain unchanged. Meanwhile, five-year Government of Canada bond yields have ticked upward since last week, likely increasing fixed rates.
The Bank’s statement on Wednesday heavily referenced the ongoing geopolitical strife caused by the war in Iran, which has sent financial markets into a tailspin and spiked the price of oil over the past several weeks.
That turmoil showed little sign of easing on Thursday morning as US president Donald Trump warned the ongoing blockade of the Strait of Hormuz could last months, and the central bank clearly remains worried about inflation if the oil crisis risks inflaming prices further.
Governor Tiff Macklem struck a careful tone in remarks at Wednesday’s press conference, signalling that the policy rate will likely remain steady for now but could change depending on the crisis in the Middle East.
Homeowners and homebuyers, then, are left in the lurch as they ponder the interest rate path ahead and wait to see what could lie in store for borrowing costs when the time comes to purchase a home or renew their mortgage.
“Among homeowners, there’s a good number of them that are expecting to see their payments rise,” Steve Ng, a senior district manager with TD, told Canadian Mortgage Professional. According to recent TD research, “more than half of them say that because of that, they’re going to have to cut back on things like day-to-day spending,” he said.
Borrowers’ risk appetite remains central to decisions
Each borrower’s specific circumstances are different, but Ng said he’s still seeing a decisive shift toward fixed-rate mortgages in the current environment.
“If they’re looking for comfort, then fixed rates are where it’s at,” he said. “Variable rates may suit some, but for the most part, more and more Canadians now are moving to those fixed rates because of that uncertainty going forward.”
Three- and five-year terms are especially attractive to borrowers at present, he said, because they allow peace of mind during a potentially prolonged period of instability.
That mightn’t offer significant comfort for borrowers emerging from ultra-low pandemic-era mortgages who enjoyed rock-bottom rates when they bought in 2021 or early 2022.
But with most economists now expecting the Bank of Canada to sit on the sidelines for a prolonged spell (potentially through this year and 2027) could variable-rate options grow in appeal if they’re expected to remain steady?
Again, Ng said it depends on borrowers’ individual risk appetites. “Because the Bank of Canada’s approach right now is to wait and see, we could potentially see a larger disparity between variable rates and fixed rates,” he said.
“When we’ve seen that happen in the past… people start looking at their pocketbooks. Some people are willing to take that risk with variable, but to each their own. Everybody needs to assess the risk for themselves, and everybody’s situation is different.”
‘We want people to engage their advisors sooner’
Mortgage professionals have long emphasized the need for borrowers not to rest on their laurels and wait for their mortgage renewals to arrive, stressing the importance of a proactive approach to explore all options and gain a full understanding of their financial picture.
That’s even more essential in the current environment, according to Ng, with economic uncertainty showing no sign of fading anytime soon.
“We want people to engage their advisors sooner,” he said. “Human nature is always to procrastinate and to wait to see what happens. People will always hope that things will get better, but the reality is that the sooner they engage their institution, the more options they have and the less they’ll get caught off guard.
“You can still put some meaningful discussions and plans in place now, even if you don’t make a decision today. You can potentially have some backups that you can work towards.”
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