Mortgage Rates in a Rising Interest Rate Environment

Raising interest rates is the Bank of Canada’s (BoC) weapon of choice to combat inflation. For the first half of 2022, the BoC is expecting the average inflation rate to be ~6% in Canada, which is well above the 2% inflation target. Thus, on April 13, 2022, the BoC raised its over-night lending rate to 1%, an increase of 0.5%, and more increases are expected.

A couple of factors that have driven-up the inflation rate is the war in Ukraine, and China locking-down again due to the Omicron variant. The war in Ukraine and the subsequent global sanctions on Russia caused oil, natural gas, and other commodity prices to spike.  Whereas, in China, continued supply chain issues caused by further Covid lockdowns, coupled with strong global demand for its products, led to increased prices across the board. All of which have caused the BoC to now be active with its interest rate policy.

So, what does this mean for individuals with mortgages? As the BoC increases their interest rate, the retail & commercial banks across the country also increase their prime lending rates, which then increases mortgage rates in the following way:

Fixed rate mortgages allow borrowers to secure the interest rate for a specified term. For this security, the rate is a bit higher than variable rate mortgages, but with rising rates the borrower will not face an interest rate increase until the mortgage renewal. Thus, fixed rates are suitable for individuals who want the security of a steady mortgage payment.  However, for individuals who need the flexibility of breaking their mortgage before renewal, a fixed rate mortgage can be costly. To help avoid this cost, the mortgage can be portable to another property, but you will need to pay the penalty up-front before the bank reimburses you.

Variable rate mortgages track the movement of the bank’s prime rate, and to start are generally lower than fixed rate mortgages. However, as rates rise a variable rate mortgage has potential to be more costly over time than a fixed rate.  But, if one needs to break a mortgage mid-term, this may be worth it as the penalties are much smaller.

I hope this gives some clarity of why interest rates are expected to rise, and how they may affect your mortgage.  For further input or discussion, please reach-out to your Financial Advisor.

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