Bank of Canada rate is expected to increase by 500% in 2022.
What does that mean to your mortgage?
The market is expecting Bank of Canada to increase the overnight rate 5 times in 0.25% increment this year to combat inflation.
5 times sounds scary, but let’s break it down. The current overnight rate is at 0.25%, which is very low.
After 5 increases, it will be at 1.5%. Only 1.25% higher… not too bad!
What does it mean for your mortgage?
- If you currently have a fixed mortgage – your rate is locked in so nothing to worry about until renewal. Keep in mind, if you funded your mortgage in the last 4 years, you were likely qualified through the new “mortgage stress test”. It means there’s at least 2% buffer built into your mortgage to ensure your income is enough to carry a higher mortgage payment should the rate increase.
- If you currently have a variable mortgage – lenders may increase the Prime Rate following the Bank of Canada rate hikes, which may in turn increase your variable rate. With some lenders, your monthly mortgage payment will Not Change, and they simply allocate more of it to Interest vs. Principle.
- If you are looking for a mortgage – it’s time to put in an application and lock in your rate!
So which one is better? Fixed or Variable?
We don’t have a crystal ball, but in our opinion, variable is still the better option.
Currently, variable rates are at 1.1%-1.3% and fixed rates are at 2.5%-2.8% for bank lenders.
Even if the variable rate increases by 1.25% in 2022, it will still be slightly lower than fixed, and you would have saved 1% over the one year period.
What does this mean for the housing market?
If we are in a “balanced” housing market with equal amount of demand and supply, when interest rate goes up, home prices will go down. But we are no where near a balanced market.
The low inventory and tight demand conditions are everywhere – in both bigger and smaller markets in Ontario.
The sales-to-new listing ratio is a great indicator of the supply-demand situations.
If the market is at 0.6% it is considered “balanced”. Higher numbers means it’s a sellers’ market.
As of the end of last year, the Sales-to-New Listing ratio is at 0.77% across Canada and 0.73% at Toronto, meaning we are still deep in the sellers’ market.
Economists expect this tight supply-demand condition to last well into 2022
This will likely counter the impact of higher interest rate, and continue to put upward pressure on home prices.
The bottom line is that despite home price fluctuations, over the long run, real estate is still one of the safest investments to help you build wealth.
Like what they say, “Time in the market beats Timing the market”
If you would like to understand how will this impact your plan to get a new mortgage or refinance your current mortgage, give us a call.
We’d love to help.