Should You Lock In Now?
Anyone that has a mortgage or loans right now is watching rates closely. The upcoming Bank of Canada rate announcement has some people worrying about what is going to happen with variable rates but also fixed rates, as both have been going up recently. These are rates that we saw in 2008 before the Global Financial Crisis.
You may be coming up for renewal and aren’t sure about what to do. Affordability might be on your mind as you may have been locked in under 3% in your current mortgage.
Reality is this-most likely Prime rate will go up by an additional 0.50% on June 1, which is higher than some projected. If you are in a variable rate mortgage, and we use a discount of 1.10% below Prime rate, that means your rate would go to 2.60%, which is still phenomenal.
The rate increases we have seen so far are doing their job in the housing market, which is a large driver of the economy. If rates continue to rise, this will most likely cool the housing market even more, and most likely quite quickly. This is a good article to read around housing prices.
What is going to happen for the rest of 2022? While we don’t know for sure, based on current information, we should expect further rate increases of around 1-1.25%, including the June rate announcement. This would bring the rates to the Bank of Canada’s neutral range of 2-3% for the overnight rate.
Most forecasters are saying we shouldn’t see any further rate hikes for 2023.
As we have discussed, you budgeted your payment on a rate of 4%, so while your payment will go up, you have prepared for that already.
Remember, what goes up will most likely come down. Historically, a period of high inflation is following by a period of deflation (recession). It is the rollercoaster of the economic cycle. So, rates may not stay at these higher rates as a recession means lower rates.
In the illustration below I have created a what if scenario. What if you had a $300000.00 mortgage that you took out in December 2021 when prime rate was 2.45%? Factoring in the rate increases so far, plus an additional 1% increase for the remainder of 2022, 0.25% for 2023 and 0.25% in 2024 then no further increases for 2025 and 2026, would you still be ahead compared to locking in to a fixed rate of 4.14% today?
The answer is yes, by a long shot. Even with a total rate increase of 2.75% over 3 years, you still save $5697.97 in interest and $ 1744.49 in principal.
On June 1 I will send out an email letting you know what the Bank of Canada has adjusted Prime lending rate to.
As always, reach out if you want to discuss your situation.