Even if you aren’t up-to-date on your mortgage jargon, you are probably aware of the basic definitions and differences between an adjustable, or variable, and fixed interest rate. However, taking it a step further, what does this mean for your mortgage? Maybe you are trying to secure your pre-approval and aren’t sure what all the fine numbers mean? Well, look no further because we’re going to debunk the confusion surrounding the basis to any loan— Which type of rate works best for you? Especially in these unpredictable times.
Government of Canada Bond Yields
First, it is important to understand that the economy has changed. With all the preventative and supporting policies emplaced by the Government of Canada, our rate structures have also changed. It is crucial to understand that there is a direct correlation between the Canadian Government bond yields and fixed mortgage rates. When bond yields rise, so do fixed rates, and vice versa. With the current bond yield rates being so low, you could be saving substantially on a refinance right now by securing a very low rate.
Prior to coronavirus, it was expected to pay a higher rate for a fixed rate mortgage. Simply because historically, it meant you were paying a premium for the certainty of your fixed rate instalments. However, since March 2020, bond yields plummeted and left in their wake increasingly low fixed rates. Many are now encouraged to take on a 5-year-fixed rate mortgage plan. Because you’d be securing a record-breaking low rate. For a while, there was very little difference between the variable and fixed rates, however, with the recent spike in bond yields, there has been an increase in fixed rates accordingly. Increasing the spread between fixed and variable rates by nearly a percent. Which prior to the recent change, had swayed borrowers to choose a fixed rate because they weren’t taking the risk that variable rates might rise.
The Overnight Lending Rate
Variable interest rates, in comparison to fixed, depend on the overnight lending rate, or in other words, the interest rate set by the Bank of Canada. Since their last meeting, they have decided to maintain their commitment to keeping the prime lending rate low. Even more surprising is that the BoC has been very clear on their expectations for the future. Predicting that the rate will stay relatively low until 2023.
Which Is Better?
So the question remains. Is a fixed or a variable mortgage rate best for you? Well, the answer is it depends. The only way to make sure that your financial plan is the best option for you is to call a mortgage professional. They’ll be able to work out the fine details of your current situation and recommend the best option for you.
But ask yourself: is a five-year-fixed-rate the best option for you, knowing that the BoC intends to focus on the GoC bonds as they follow alongside national recovery? Are you able to face the prepayment penalties that accompany fixed rates if you were to break your mortgage mid term? It is also crucial to remember that with a variable rate mortgage, you can convert to a fixed-rate mortgage at any time, and at no cost.
Another reason to choose a variable rate mortgage is that BoC Governor, Tiff Macklem, has announced that interest rates will not be rising in the foreseeable future as they focus on reprimanding the economy and national recovery due to the pandemic. So the historical risk associated with variable has been mitigated for the near future.
Contact us today
We hope that this article was helpful in getting a brief overview of our current economic situation. And in turn, how it can and will affect your mortgage rates. Again, the best solution is to contact a mortgage professional, and where better to look than the mortgage professionals themselves.
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