Interest Rate Review with Peter Trevisan
Peter came to visit us last week to discuss interest rates and provide advice for our clients.
With inflation, changing interest rates, and a confusing housing market, buyers and current homeowners may be interested to know more about the future of their mortgages.
Today, we spoke with Peter Trevisan of TD to learn more about how interest rates are going to be impacted in the future, and what we need to know.
Peter explains that interest rates had maintained relatively stable from 2017-2020. The average 5-year fixed rate here was around 3%. Into spring of 2020, fixed interest rates fell below 2.5% throughout most of the pandemic. They are now on the rise as we enter 2022. Economic instability and supply chain issues led us to higher interest rates.
Now, entering summer 2022, we are seeing 5-year fixed interest rates the highest they’ve been in 15 years, sitting at over 5%.
The benefit of a fixed mortgage is that your rate stays the same for the full 5 years. If you plan to own a property for a long time, knowing that you are staying at a rate you can afford is an ideal and enjoyed certainty for a lot of people. On the other hand, though, fixed-rate mortgages also have steep penalties if a mortgage is broken.
With the recession looming, other candidates may also consider that interest rates may be dropping in the near future, leaving potential buyers with buyer remorse when others are getting lower rates.
So this brings us to the question, what is the other option? Peter tells us a bit about variable rates next.
These rates are dictated by the Bank of Canada’s Prime Interest Rate. It will change as the Prime Interest Rate changes.
Same as fixed interest rates, we saw a decrease in the Prime Interest Rate during the beginning of the pandemic in order to allow people to stimulate the economy and borrow more money.
As inflation increased, the Prime Interest Rate had to also be increased to combat this during the Spring of this year. Its rapid increase is meant to assist in slowing inflation. It is assumed that this rate will continue to increase a few more times before inflation is brought down to a manageable amount.
In the past, variable mortgage rates were typically a clear choice for many Canadians, and have saved many homeowners thousands of dollars in interest throughout their mortgages. In addition, they also provide better flexibility to mortgage owners, because the penalty for breaking the contract is much lower, and many lenders will even allow borrowers to switch to a fixed-rate at any time.
The downside to a variable rate is that if the interest rates continue to rise, a variable rate borrowers will have to increase how much they are paying.
So what advice does Peter have?
Quick Tip
If you are a current borrower:
Be prepared. Mortgage owners should expect to see their rates hiked significantly at their next renewal. Are you budgeting for this increase?
Refinancing your mortgage, especially if you are expecting an increase this year or next, may be ideal. Most likely, you’ve seen a large increase in the value of your property!
You could also take time to shop around and see what other lenders are offering. Many lenders incentivize borrowers for switching around their renewal.
If you are looking to buy:
Get pre-approved! You can establish a budget for yourself AND be protected from any increases for around 120 days, depending on the lender.
Did you know condo fees are taken into consideration, meaning you will have less money for your mortgage?
Keep track of the money you’re planning to use for your down payment because lenders will want to see a 90-day paper trail before granting approval to use it.
Did you know it isn’t just first-time home buyers who can use a 5% down payment? If you are using an insured mortgage (protects the lender (not you, the consumer))
But, if you can, put down 20%. This will save you on default insurance premiums and opens the option to amortize your mortgage over 30 years.
