Fixed-rate mortgage costs take their cue from what’s happening in the bond market, where the prevailing view is that we’ve seen the worst with inflation. Rates in the bond market have fallen sharply in recent weeks, which means we could see lower fixed mortgage rates before too long.
The latest increase in the Bank of Canada’s overnight rate means higher costs for variable-rate mortgages, but there’s a positive spin here, too. If we haven’t reached the peak for the overnight rate, we are darn close.
Whether you’re a borrower, a saver or a conservative investor interested in guaranteed investment certificates, we are very close to an inflection point on rates that requires fresh thinking. Savers and GIC investors, we’ve likely reached the “as good as it gets” point. Borrowers, your job is to endure until rates decline.
For now, there is this one last 2022 interest rate hike to process. If you owe money on a variable-rate mortgage, line of credit or floating rate loan, expect your borrowing cost to rise by the same 0.5 of a percentage point that the Bank of Canada applied to its overnight rate on Wednesday.
Looking ahead to early 2023, expect the Bank of Canada to either hold the line on rates or make one or two more modest rate increases. Then, we wait for the pullback in the inflation rate that we need for interest rates to decline. Borrowers, this could take as long as a year. Can you make it through by managing your spending and dipping as required into resources like a tax-free savings account?
If not, get help before you miss a payment and damage your credit score. Talk to a non-profit debt counselling agency, or see what help your lender can offer. Globe personal finance reporter Erica Alini recently wrote about some emergency tools for financially stressed mortgage holders.
If you’re renewing a mortgage, you’ve probably heard talk lately about the utility of one-year mortgages as a place to hide out until rates get sorted out. But right now, lenders are charging more for one-year mortgages than for fixed five-year terms. A thought: Go variable.
Variable-rate mortgages were once almost magical in how reliably they kept borrowing costs to a minimum for homeowners. The variable-rate brand was trashed this year, but it’s time for a rethink. You might at worst have to ride rates one or two clicks higher, and then you’re in position to benefit from rate cuts down the line.
A variable-rate mortgage today might go for 5 per cent, while one-year fixed rates are between 5.6 and 6 per cent and five-year fixed rates are in the area of 5 per cent. Going with a fixed rate of any term only makes sense if you think inflation is far from done, or you’ve had your fill of stressing about mortgage rate hikes and feel that locking in a rate will ease your mind.
The interim period until rates fall is also an endurance test for mortgage holders and people who have run up their home equity lines of credit. HELOC costs can be as high as 6.5 to 7 per cent after the latest increase in the Bank of Canada’s overnight rate, which is expensive. The days of casually carrying a big HELOC balance are done until the overnight rate comes down a couple of percentage points.
For savers and GIC investors, there is a bit of melancholy in the interest rate shift that will take shape in the months ahead. For decades, respectable returns from savings accounts and GIC were nowhere to be found. We now have 2 to 3 per cent or slightly more available on savings and 5 per cent or a little more from GICs with terms of one through five years.
If a worry-free 5 per cent appeals to you, dig in now. The same bond yields signalling lower mortgage rates also portend a decline in GIC rates. An en masse retreat by banks from the 5 per cent threshold could start any day now.
One final thought on the outlook for lower rates is just for retirees. Rates have a big influence on the amount paid out by new annuities. A year from now, annuities could be much less attractive than they are now.
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The Globe and Mail
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