Hold...HOOOOOLLLLDDDD! (He says in his best Braveheart Voice...)

The More Things Change

...the more they remain the same. Stop me if you you've heard this one before but Bank of Canada (BoC) Governor (Uncle) Tiff Macklem decided to keep the Overnight Rate steady at 0.25%. I'm running out of ways to dress that statement up. But it's very likely that at the next Monetary Policy Report meeting on March 2nd, I'll have to find a clever and witty way to let you know that the overnight rate has increased. There was a growing expectation that we would see at least a 0.25% increase today. Economists and analysts have been calling for an increase to curb inflation and for the Bank of Canada to start the tightening cycle. So why didn't they?

Where We Are At Today

From where I sit, there seems to be three reasons as to why rates didn't move today:

1. There is a strong belief that the primary driver of inflation are supply chain issues and bottlenecks 
2. The wage increase concerns are muted with Canada expected to welcome another 400,000+ immigrants that will help fill job vacancies
3. Governor Macklem said they wouldn't increase rates without forward guidance

One of my primary takeaways is the BoC is doubling down on their belief that inflation is largely being driven by increased energy costs and broken supply chains that will naturally ease off as restrictions are lifted and the global economy returns to normal. Many Canadians are feeling the pinch of these increased costs in their budgets (gas, food etc.). Adding higher borrowing costs through increased interest rates for something they believe will resolve naturally is something they want to avoid. Many lower income Canadian households are already stretched thin and I think they want to allow time for these issues to resolve before adding another burden.

The jobs market is a trickier issue to navigate. Canadians and Business owners almost universally expect inflation to be more than a short term issue. And as is the case with most things in life, what we expect, we tend to bring into reality. Job seekers will want increased wages to match their increased costs. And business owners have positions to fill and not enough job seekers. But with another 400,000+ new Canadians expected to be welcomed as we saw in 2021, the increase of supply of workers should help to mute any wage increases. And that's really what we're trying to avoid here: increased wages would see inflation become a more persistent issue. This is one to keep an eye on. By comparison, the US is facing much more upward pressure on rates. In 2021, they welcomed just 500,000 new citizens. And last I checked, they're ~10 times our size so Canada is in much better shape in the jobs market.

Say what you want about the decision today. At least one thing is confirmed: the BoC holds true to their word. Governor Macklem has explicitly said that they would not increase rates without some notice. And today, we received that notice. Rates will be going higher. Almost certainly in March. But a raise of rates today would have run contrary to the guidance they have been giving us. I have to think this influenced the decision today at least a little.

Where Do We Go From Here?

Upwards. At least that's where variable rate mortgages and Home Equity Lines of Credit rates are going. And for many of us, our payments will move with it. But what do we do with that information and how do we attack this? My first piece of advice is to take a deep breath. Maybe meditate. Pet your dog. When we chose a variable rate product, we knew this day was coming and it was part of our plan. The coming increases don't necessarily change the plan. But that said, you do have options:

Option 1: Stay The Course (*)

This is the option I will be taking. Hold firm. Ride the wave. But with one small asterisk: I will look to increase my payment ahead of the rate increases. This will accomplish two things:

I get to pay down some principle while rates stay low banking some extra savings before the inevitable happens

Adjust to higher payments that will be coming in the months ahead. And at least I can do it on my terms

Option 2: Lock In To Fixed Rates

I personally don't like this option. I think fixed rates have priced in too many rate increases. In my 14 years as a Mortgage Broker, I have never answered so many questions about where rates are going than I have recently. That tells me that Canadians are VERY sensitive to rate increases and when they happen, they will be much more impactful than in previous rate increase cycles. All this to say that I think we will see less rate increases than what is expected so locking in to me means you will be paying a premium today. 

That said, I'm all for peace of mind and your mental health. If watching rates is too stressful and costing you sleep at night, then locking in isn't the wrong decision. If you need to get off the roller coaster, I completely understand and I'm happy to guide you through that. Fixed rates are still very low historically and I won't tell you it's the wrong choice if that's what you're feeling.

Option 3: Extend Your Amortization

If you like the variable but are still worried about your cash flow, you can always look at a refinance to extend your amortization. It will lower your minimum payment which you always have the option to increase at your own comfort level. And in some cases, the variable rate today might be lower than what you're paying so it could save you some money. If you'd like an analysis done on your mortgage, let us know and we'll be happy to help optimize your mortgage.

Parting Thoughts

If you've made it this far, congrats. Send me a text and I'll send you a $5 Starbucks or Tim's card just for bearing with me. It's the least I can do for you geeking out with me on this! Seriously. Do it.

We all know higher interest rates are coming. But don't let the headlines make you forget that we always knew they were coming and this was part of a bigger strategy for your mortgage. The hyperbole and fear of those headlines has a purpose. But if you do get sucked down the rabbit hole of 'what ifs', never hesitate to reach out and I will be happy to answer your questions and offer up some guidance.

And as is always the case, if you enjoyed this and found it helpful, pass it on to a friend! We always welcome your questions and feedback.