I keep hearing interest rates may rise. What would that mean for my mortgage?
FPAC response:
As you’ve heard, the Bank of Canada recently announced it would be ending its “quantitative easing” program, the government bond purchasing program that contributes to keeping interest rates low.
The end of quantitative easing means that the bank is expecting to increase its policy interest rate—which means that variable interest rates from mortgage lenders will rise in turn. (Fixed mortgage rates are based on long-term bond rates, while variable mortgage rates are based on the Bank of Canada’s policy rate.)
Currently, the Bank of Canada’s policy interest rate is 0.25%, and it may increase multiple times over the next few years. Each increase is typically 0.25%, although bigger jumps aren’t out of the question. Numerous interest rate hikes in the coming years might bring rates for variable mortgages from about 1.45%, where they are now, to 3.45% or so in a few years, when you’re ready to renew.
If variable mortgage rates are expected to rise, to answer your first question—whether to keep your variable mortgage or lock in your mortgage rate—we need to weigh whether or not you might save money if you lock in your mortgage at the current three-year fixed rate.
The current three-year fixed rate ranges from about 2.49% to 2.79%, which is still relatively low compared to historic rates. If variable rates rise above the fixed rate that you could lock in at today, then based on the math alone, it appears there may be cost savings to locking in at a fixed rate.
However, this issue is a bit more nuanced than the simple math. Here are a few thoughts to help you think through this carefully.
Is this your primary residence or a rental property?
This question is essential because it considers your cash flow and your ability to meet your payment obligations. I’ll address considerations if it’s your principal residence below, but first, let’s run through the issues assuming it’s a rental property.
Assuming this is a rental, are you currently cash-flow positive, negative or even neutral? If you are currently cash-flow neutral, a rate increase will push you into negative territory—is your personal cash flow able to handle that deficit?
If not, I might consider locking in if you plan to hold this property past the three-year mark. (Keep in mind that it’s possible to be cash-flow negative month-to-month but return to positive once you file your taxes and deduct all related expenses.)