Overnight Lending Rate Remains Low - Those with Variable Rate Mortgages Will Benefit
There was more financial news this week that directly affects the mortgage and housing sector in Canada and for Ontario homeowners or those seeking mortgage financing. The Bank of Canada (BOC) announced that the overnight lending rate will stay put for now.
The BOC took the drastic measure last Spring to lower the overnight rate by several percentage points to the historic low of 0.25%. This measure coupled with the Government's monetary backing of mortgage-backed securities to the tune of $150,00 billion dollars was enacted as a direct response to the worries over the potential impact Covid-19 would have on the housing market.
By now, most will have heard the news that the prolonged pandemic sent the housing market across the country and in Ontario into overdrive. Appreciation gains in the double digits and over asking offers became the “norm” through 2020 and into the first quarter of 2021.
Despite these positive numbers, the Government is erring on the side of caution when it comes to long-term economic stimulus and growth across all economic sectors. The decision to keep the overnight lending rate at such a low level is a deliberate one and is in place to encourage economic expansion as well as curb inflation in the short term. Current inflation levels stand at 3 percent, according to the same BOC report released this week.
What Does This Mean for Ontario Homeowners?
When negotiating mortgage financing, the main distinction all homeowners who maybe renewing mortgage terms or first-time borrowers need to determine is the type of mortgage interest arrangement. The two types of mortgages open to borrowers are a fixed rate and a variable rate mortgage. When looking at a variable rate mortgage, the mortgage rate that most lenders can afford relate directly to any changes to the overnight lending rate. At such low levels, lenders can afford to offer a discounted variable mortgage rate on most loans.
When it comes to a fixed mortgage rate, the rate offered by the majority of lenders is determined, by a large part, by any increases in the Bond rate. An increase in the bond yield will impact the fixed rate mortgage as the rate will head northward as bond yields head up.
Do Your Homework and Choose the Mortgage That Fits your Financial Picture
So should we all rush out and switch to a variable mortgage rate? The answer relates directly to what mortgage type works with your financial goals and lifestyle. Many potential homeowners are far more comfortable locking in a mortgage term with a fixed rate. This contributes to stability in monthly mortgage payments and is predictable until the mortgage comes up for renewal; 3-year, 4-year, or 5-year term for example.
While the exceptionally low variable rate will tempt some to choose a variable rate mortgage or want to switch to variable-rate, one will be able to take advantage of these low rates until the first quarter of 2022, when the BOC has speculated that the overnight rate may start to increase. If living with the possibility of a rate increase fits your overall financial picture then this may be the mortgage route to take. The option is there and the answer lies with a homeowner's preference.
As always, my advice is to talk to a professional so you can know all the information and be able to weigh the pros and cons involved in both a fixed rate mortgage vs. a variable rate mortgage.
Contact me today for all your mortgage needs and questions.