Analysis: Prevailing environment ideal for variable-rate products in Canada

The Bank of Canada's rates are likely to remain static for the next 12 months or so, observers say

Analysis: Prevailing environment ideal for variable-rate products in Canada

The current economic and lending environment is best suited for those who currently hold variable-rate loans, amid the high likelihood of rates remaining static for the next 12 months or so, according to a new analysis by Ratehub.ca.

The latest Bank of Canada announcement kept the overnight rate at the effective lower bound of 0.25%, which represents prolonged stability for Canada’s borrowers.

“For mortgage shoppers, the most significant news out of the announcement is that the bank remains committed to leaving the key overnight rate unchanged until the second half of 2022,” said James Laird, co-founder of Ratehub.ca and president of CanWise Financial mortgage brokerage. “This is good news for anyone who currently has a variable rate and anyone choosing between fixed and variable might lean more towards variable rates in light of this announcement.”

This comes amid a backdrop of good news both for the Canadian economy and the global financial system.

Read more: Canada sees its lowest five-year variable rate so far

“Globally, the [BoC] is predicting higher oil prices and 7% year-over-year GDP growth,” Laird outlined. “Within our borders, the bank is expecting to see an employment rebound in the hardest hit segments of the labour market, which will help achieve their expectation of 6% GDP growth.”

Laird acknowledged that various threats remain, including the rise of more virulent COVID-19 variants and the national inflation rate remaining above the central bank’s 2% target. However, the inflation bump is likely temporary, with the bank expecting this level to moderate “in early 2022.”

The caveat is that variable-rate products are only recommended for those “who are comfortable with a little more risk,” Laird stressed.

“Anyone who puts a lot of value in rate certainty should still go with a fixed rate,” Laird suggested. “With the variable rate at a record low of 0.98%, and the fixed rate near its record low at 1.74%, Canadians have two excellent options to choose from.”

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