How to Choose the Right Interest Rate Term in the Environment Ahead? 

This post is written by Trusted Partner, Dalia Barsoum of Streetwise Mortgages. To become a contributing editor, please contact our Real Estate Investor Solutions Specialist, David Maxwell at david@reincanada.com.

Hi, I’m Dalia, founder of Streetwise Mortgages.

If you are currently feeling overwhelmed by the uncertainty in the real estate market and the sheer volume and pace of news relating to the lending, credit and  the real estate landscape.

I want you to know that you are not alone. 

I’m here to help mute some of that noise and share with you the few key things that you need to be aware of heading into the next 12 months, so you can make an informed not an emotional decision with respect to rates if you are planning on buying a property…. (because we are definitely seeing more momentum), or refinancing or if you have a mortgage renewal coming up. 

First, let me paint a picture of the backdrop of the rate environment :

• The Bank of Canada has signalled to hold off any further increases to the overnight rate and did confirm its position by not raising the overnight rate during the last BOC meeting. Inflation is easing up based on the CPI trends although the labour market remains tight.

• The collapse of Silicon Valley Bank and  Credit Suisse in the U.S. has created extra uncertainty about the stability of the financial system in the U.S. and global concerns about banks’ liquidity overall. 

With this backdrop:

The rate hike cycle in Canada appears to have finally ended. This is comforting for many and the market is expecting the next move by the Bank of Canada to be a rate cut in Q2 of 2024 and potentially sooner. 

No one really knows the exact timing but a rate cut is now on the horizon. Cuts will happen gradually to bring prime down over time by 100 – 200 points and we will unlikely see prime go back to pandemic levels unless something significant triggers that. 

Fixed rates have dropped over the past few weeks as the bond market reacted to the uncertain credit environment. 

Right now something funky is going on with rates. 

The  1, 2, 3, 4 and 5 years fixed terms are Lower than where the 5 years variable rates are and the longer the fixed rate term the lower the rate at the moment.

Also, banking regulators in both Canada and the U.S. are proposing changes that will result in tighter lending overall. 

What does all of this mean to you?

1. Given that a cut by the BOC is now on the horizon :

I invite you to consider riding the rate roller coaster as it goes down as that will save you interest and help your cash flow.

How do you do that? 

If you are currently on an adjustable-rate mortgage. As much as it is painful right now as your payments have gone up significantly, sticking with your adjustable rate mortgage means that your monthly payment will go down immediately as soon as Prime starts to go down and it will continue to do so every time the BOC cuts the overnight rate. 

If you are on a variable rate mortgage, where the payment stays fixed but the allocation beneath the surface between interest and principal changes as the BOC changes the overnight rate, you need to check with your lender what their policy is with respect to adjusting payment. Being on a variable rate does not guarantee that your payment will go down. 

If you want your payment to go down, then consider switching to an adjustable-rate mortgage. 

If you are going to make a new rate decision because of a renewal, purchase or equity takeout. You may be tempted right now to take a long-term fixed rate loan because the rates are lower (and they are cheaper the longer the term). 

While that may serve you in the short run, it will hinder your ability to benefit from lower payments when the rates start coming down.

Consider therefore a 1-year fixed term or a variable rate. 

Now, although I am sharing with you an overall rate strategy, your final rate decision should be within the context of your personal plans and plans for the property over the mortgage term. 

Therefore it is important to consult with your mortgage advisor to assess the suitability of the mortgage product and term to your individual circumstances. 

2. With tighter lending guidelines on the horizon, consider increasing liquidity and restructuring any expensive debts that you have.

You can increase liquidity by setting up a secured LOC or increasing those that you have. 

Restructuring debts now will help you enhance how your balance sheet looks for any future financing that is needed under tighter guidelines. 

My team and I are here to help you make the right and most informed rate decision, given your plans and current finances. We are here to help you move forward with certainty despite the uncertain environment.

We are just a quick email away. Reach out to us at info@streetwisemortgages.com