The Bank of Canada has increased their rate by 1.25% since the beginning of the year and are not finished. The next scheduled rate announcement is on July 13th when they are expected to increase by as much as 0.75%. That would be a triple increase in a single announcement.  

But will they really move forward with such a large increase?  Or is this all talk?

The Bank of Canada stated in their last rate announcement that they “are prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target”.  This means a possible 0.75% rate increase on July 13th.

But will they come through with such a large increase?

They are prepared to do so, but that doesn’t mean they will. The US Federal Reserve announced today (Wednesday, June 15th) that they will be increasing their rate by 0.75%, which is their largest single increase since 1994. Canada tends to follow the US, but that is not always the case. I think it’s still possible that they will hold to a 0.50% increase. We’ll have to wait until July 13th to find out for sure. This ‘should’ be the last oversized increase in their plan. All in all, the BOC is expected to increase their rate by another 1.50% by spring of 2023. This would bring the prime rate to 5.20%. Anything can happen of course. 

 

Why Are Rates Increasing So Fast?   

The reason why the Bank of Canada needs to be so aggressive is to bring inflation under control. If they don’t act forcefully, then it won’t just be mortgage rates that we’ll be concerned with. It will be the price of everything else as well.

They reason why inflation has become such a concern is because of supply chain issues that we created by the pandemic.  To make matters worse, Russia’s invasion of Ukraine has caused further damage to supply, thus driving inflation even further.

The expected increases from the Bank of Canada will not do anything to help the supply issue, but their intention is to bring demand down to match the current supply. This will come at the expense of the economy and will almost certainly force us into a recession.

The supply will eventually return, which can then be expected to exceed demand.  At this time, the Bank of Canada will then need to shift its focus to protecting the economy by dropping its rate. This is expected to happen at some point in 2024. 

 

What I Expect When Rates Drop

Anyone taking a fixed rate today will be locking into the highest they have been in 12 years.  Providing that mortgage rates do in fact drop in 2024 as expected, anyone in a higher fixed rate would be looking to switch to the potential lower rates at that time. Unfortunately, the penalties to break a fixed rate mortgage can make switching in the middle of the term cost-prohibitive. The further the rates drop below your active fixed rate, the higher the penalty becomes. Penalty is one of the largest drawbacks to a fixed rate mortgage, but this is usually only an issue when rates drop. Anyone breaking a lower fixed rate mortgage today would be faced with a much more reasonable penalty.  After all….the lender can now re-lend that money at a much higher rate.

With a variable rate the penalty is always guaranteed to be three months interest.

 

Choosing A Variable Rate Mortgage Today

Variable rate mortgages are still a great choice, despite the fact that the Bank of Canada is aggressively increasing the prime rate. The spread between fixed and variable is around 1.75% in many cases, which gives you plenty of protection against rising rates. Even if your variable rate moves up above today’s fixed rate alternative, this doesn’t mean that you should have chosen the fixed. It just means that you’re now starting to give back some of your savings.

For those trying to decide between fixed or variable, or those who are currently in a variable rate mortgage, I would recommend reading the following of my recent blogs:

 

Are Fixed Mortgage Rates Now The Way To Go? 

Should You Convert Your Variable Rate Into A Fixed? 

How Many Rate Hikes Will It Take To Lose With A Variable Rate?

 

Conclusion

As I’ve mentioned multiple times in previous blogs, the faster and more aggressive the Bank of Canada gets with their rate increases, the sooner it will have to make a downward correction. Rates can move down as fast as they move up…and the BOC will eventually start cutting their rate. While riding out a large upward swing in a variable rate is not exactly fun, riding it back down will be quite enjoyable for anyone in a variable rate mortgage at that time.

We can only speculate based on information that we have today. Time will tell and anything can happen. 

 

Please leave any questions or comments below!