This wasn't the raise I was hoping for....

With Rates Rising Again, What To Do...

Governor Tiff Macklem and Bank of Canada (BoC) raised the Overnight Rate by 0.75% today bringing it up to 3.25%. And for those keeping score at home, that's a total of a 3% boost on that rate since March 2nd of this year. Today's announcement was very brief with more context to follow in the coming days. Follow me on Instagram (@rayatnestmortgage) for more updates as the week goes on and more information becomes available. I promise I'll follow back!

What Do We Know?

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The message that was sent today was short and not-so-sweet: The BoC judges that rates will need to rise further from where they are to reign in inflation. By how much and when will be determined by how previous increases filter through the economy. If there is good news - which is hard to pull from where things sit - it's that we're likely not far from the end point of these rate hikes. The Canadian economy is beginning to slow. Headline inflation dipped in July. And since then, we've seen another 1.75% boost to rates that will only serve to put further downward pressure on growth and inflation. The bad news is much easier to find: core inflation is still on the rise which means that the BoC ain't done yet. The effects of these rate increases take time to do their thing. And the BoC doesn't seem to be terribly scared of a recession.

Real Talk on Your Options

We've all been analyzing these moves ad nauseam since the beginning of the year and trying to predict the next move. But ultimately, the crystal ball is pretty murky and most of us just want to know what our options are. So to that end, let's have a frank conversation on said options:

Rate Perspectives 

Arguing for Variable Rates: Prime will be moving to 5.45% after today's increase. If we assume an average discount of ~0.75% over the past couple years, variable rate borrowers will be paying ~4.7% on their mortgages for now. Fixed rate mortgages by comparison will sit at ~5.34% for those that want to convert. So variable rates are still coming at a discount. And with each successive rate hike, the likelihood of a recession increases. And a recession could potentially force rates down in the coming years. It's also important to note that fixed rates have edged downwards since July's rate hike and there is little to no upward pressure on them after today's rate hike. Missing out on today's fixed rates is not an immediately pressing concern.

Argument for Converting to Fixed: The BoC has judged that rates still need to rise further to beat down inflation. And the issue here is that many inflationary factors are outside of their control. And so Governor Macklem may decide to hold rates at current or higher levels until inflation comes back into target range. And that could be a year or more down the road. Moving to a fixed rate will take you off the variable roller coaster and give you some fixed payment certainty for set period of time. Though if rates do drop off in the coming years, it could be expensive to break out of the fixed rates of today.

​Argument for Refinancing: The cost of everything seems to have risen. And many borrowers will have accumulated some debts to cover these costs. There's a very good chance if you're a homeowner that you have some equity available to help. A refinance can re-set your amortization, roll in some debt payments and give you some more budget flexibility. There are currently 1 year fixed rates at ~4.69% or less that may appeal to some borrowers. 

Ultimately, everyone's situation and risk tolerance is very different. If today's rate increase has you re-considering your options, please don't hesitate to reach out. We'll be happy to review your needs and provide some guidance and options going forward. And as always, feel free to pass this on to a friend in need.

All the best out there and looking forward to connecting soon!