11 July 2018

The perfect policy rate, when the BoC doesn’t have to change it in order to control the inflation or stimulate the economy, is only 2.5%, according to certain calculations. And it’s only 1% higher than what we are at today.

Moreover, according to Reuters, because of worries over a growing trade war and the current household debt level in Canada, the cycle of rate hikes may reach its peak even sooner – at 2.25%.

Even if the Bank keeps raising the rate, we’ll still have a pause after today’s increase.

Many have been debating about the benefits of variable-rate mortgages for well qualified borrowers.

Today, the spread between variable and fixed mortgage rates is about 0.90%, says McLister. In other words, fixed-rate mortgage borrowers pay much more for the confidence that their rate will not change.

According to McLister, when this spread reaches 1%, variable rates become attractive again.

However, it looks like Canadian borrowers are already eager to consider this option.

While the recent poll by CIBC shows that 77% of current mortgages have a fixed rate, 45% of homeowners and potential homebuyers would choose or at least consider a variable rate in case they had to make a decision today.

At the same time, McLister warns that if you choose a variable rate now, you should be ready for a possible 1% increase.

There’s also good news for those who are thinking about a fixed-rate mortgage, as experts believe this time fixed rates will not change so much after the Bank’s announcement. This rate increase didn’t come as a surprise, so banks had the time to prepare for it.

Moreover, the banks have been quietly reducing the five-year fixed mortgage rate for some of their best customers. This discretionary rate, sometimes offered to well-qualified borrowers, went down from 3.49% to 3.44% since May.

It’s probably because those banks had the possibility to borrow under more profitable terms, as the trade war tensions affect bond yields significantly.

In case the central bank does surprise everyone by expressing serious concerns over inflation or excessive confidence about the national economy, the bond yields may go up. However, they have to show a sharp increase for the banks to start thinking about raising fixed mortgage rates.

In addition to it, with the current discount for variable at Prime – 1.00% or even better for insured mortgages you will pay much less for a variable mortgage for a long period of time. Besides, you may face a rate decline later if the economy slows down and the BoC has to stimulate it again.