The Bank of Canada announced today they are leaving the overnight rate alone. This means that Prime will remain at 3.00% where it has been for a long time, and will likely stay at for the next 12 months at least (Financial Post here). With inflation remaining below the target rate of 2.00% and the world economy sputtering, there will be little interest to raise our rates other than the desire to keep Canadians from borrowing too much.
Fixed rates, which are based on the Government of Canada Bond Yields, are also remaining rater stagnant, bouncing a little up and a little down depending on the stock market…here is the 1 year chart for the Government of Canada 5 year Bond Yield:
If you add 1.75 – 2.00% (the spread the lenders wish o make) you can see where our discounted fixed rates come from.
So where does that leave you? Of course, every person’s situation is unique, but in basic terms you should have one of the following plans;
1. You are floating in a large discount variable (Prime – .50% or more). My advice, Keep floating! Ride it out as far as you can! Just have a plan in place for when rates look to move upwards whether you plan to lock in or not and into what term.
2. You are in a fixed rate below 4.00%. Rate wise you are ok, but the key here is when you are coming due…while the low rate scenario is going to be around for at least the next 12 – 18 months, low rates will not stay forever, and historically when rates start to go up, they move fast, so you need to have a plan. More on that after…
3. You are in a fixed rate above 4.00%. You likely need to look at paying a penalty or getting ready to break your mortgage in order to reduce your interest costs. The amount of your mortgage and the term due date will affect this decision. Basically it makes more sense in most of these situations to pay a penalty and get into the low rates of today which will help you pay back the penalty in savings and then get ahead, as well as let you plan for the future high rate cycle.
4. Your mortgage is coming due in the next month to twelve months. This is where it gets tougher. First, do you plan to stay in the same home for the next 3, 5, 10 years? How much extra are you paying on your mortgage and can you afford to pay more? How much more…for those that have tighter budget now is the time to look at what will happen when rates are higher and build a plan around that, not down the road when you may not be able to deal with it. I am a big believer in the current 10 year fixed rate available under 4.00% for a great many people, as it will get you through the next high rate cycle hopefully and at least when you next have to deal with your mortgage, your balance will be much lower, lessening the effect of higher rates. If you are used to floating and would prefer to “take your chances” the current crop of variable rates make less sense that they used to…in the past, if you were going to take the risk of floating, you received a good discount to offset the risk. Now, with very little discount off of Prime, variables no longer make as much sense. I recommend a 1 or 2 year for those not wanting to lock in to the 10 year. 5 years make much less sense as they will likely come due when the high rate cycle is with us.
Remember, this is a very generic layout, and your situation is unique. We like to first find out what your plans, needs and goals are and then build a strategy around them. Please feel free to comment or contact me directly.
Michael Anthony Lloyd
