Managing your Mortgage in Today’s Rising Rate Environment
What’s happening with mortgage rates?
On July 13, the Bank of Canada raised its benchmark interest rate by a full percentage point – the biggest hike since 1998 – in an attempt to cool off inflation, taking the rate to 2.5%. Major Canadian banks promptly raised their prime lending rate by the same amount to 4.7%.
Prime rates dictate the interest rate on many types of loans, including variable rate mortgages and home equity lines of credit (HELOC). Canadians holding such loans will see their interest payments increase significantly as a result of the latest rate hike, putting greater stress on their cash flow and finances at a time when inflation is at a four-decade high. We are getting calls daily asking if locking in rates at this point is a good idea. Just like your portfolio, our response is dependent on your capacity to withstand higher payments and your tolerance for fluctuating payments.
What can you do now?
Today, if you have excellent credit, you will likely be able to get a new 5-year variable rate mortgage in the range of 4.0% to 4.4%, and a 5-year fixed rate mortgage for 5.0%-5.5%, which is a far cry from the 1.5%, 5-year variable and 2.5% 5-year fixed rate mortgages we were seeing in 2021. If you currently hold a variable rate mortgage that carries an interest rate of prime minus 1 or greater (current variable mortgage rate under 4%) and you are able to withstand payment fluctuations, you will likely want to ride out these rates and not switch to a fixed rate at this point. But if you believe that a rate over 5.5% (current fixed rates) would severely affect your finances, then you should certainly consider locking in.
As with your investment portfolio, not one size fits all. If you have questions or concerns about your cash flow and debt management, please reach out to your Advisor, who can look at your holistic financial plan and help you determine the proper path to managing your mortgage and overall debt.
Written by:
Ryan Smillie, CFP®, CIM®, BA (Econ)
Associate Portfolio Manager
Luft Financial, iA Private Wealth
