Variation in mortgage rates: What should you do?
It's normal for a responsible homeowner to have questions when interest mortgage rates change. Here are some tips if your mortgage is up for renewal or if you currently have a variable rate.
Why do rates fluctuate?
When the price of goods and services like gas, groceries and housing rises, the cost of living goes up. This phenomenon is called inflation. Central banks (like the Bank of Canada) monitor these changes through the Consumer Price Index. Their objective is to keep annual increases in the 1% to 3% range—this represents stable, manageable growth.
Central banks' main leverage is their key rate, which financial institutions use to set interest rates for their products. Against this backdrop, gradual rate hikes are to be expected to try to slow inflation in general. This tactic rebalances the economic cycle in the medium to long term.
Every increase or decrease in the Bank of Canada's key interest rate has an impact on the economy, inflation and the interest rates offered by financial institutions—including mortgage rates.
Do you have a variable rate mortgage?
Remember that your payments stay the same, even when rates change. If there's a rate hike, less of each payment will go towards paying down your principal. It's important to understand that if rates go up enough, your payment amount may no longer be sufficient to cover the interest portion of your loan.
To minimize the impact of rate increases at renewal, you may want to consider increasing your current payments or making principal repayments, if you're able to do so. Conversely, a lower rate means that you repay more of the loan principal with each payment.
Is your mortgage up for renewal?
If your mortgage matures in 120 days or less, you can renew it now without having to pay a penalty. The sooner you start thinking about your mortgage renewal, the better! You can also take this opportunity to make sure you choose new loan conditions that meet your current needs.
Your advisor can assess your current financial situation and run simulations to help you choose a new mortgage that meets your needs.
To learn more: A few things to consider before renewing your mortgage