Here goes another interest rate hike. Time to consider variable-rate mortgages

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Canadians who don’t qualify for mortgage ‘can buy a smaller home’: BoC
Canadians who don't qualify for mortgage 'can buy a smaller home': Stephen Poloz – Jul 11, 2018

Editor’s note: This story was updated after publication to reflect the fact that the Bank of Canada raised interest rates on Wednesday, July 11, 2018.

As widely expected, the Bank of Canada (BoC) raise its key interest rate on Wednesday. It was the fourth hike for Canada’s central bank since July of last year, a move that brought rates to 1.5 per cent, up from just 0.5 per cent 12 months ago.

Most Canadians probably know the drill by now. As the BoC rate goes up, so does the interest on floating-rate loans, like variable-rate loans and lines of credit. And usually, a couple of days after the BoC’s announcement, the banks announce that they’re raising the interest on new fixed-rate mortgages as well.

This time, however, the implications for mortgages may be different, experts told Global News.

WATCH: Should you get a fixed mortgage rate or a variable one?

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Should you get a fixed mortgage rate or a variable one?

It may be time to choose variable again

Variable-rate mortgages are once again looking pretty attractive, according to mortgage brokers.

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This may seem counterintuitive after a year of interest rate increases. But after Wednesday’s rate increase, the BoC likely won’t have that much further to go, Robert McLister, founder of and mortgage planner at, argued before the central bank’s announcement.

The optimal spot for the policy rate — that is, where Canada’s central bank wouldn’t have to tweak rates either to ward off inflation or to stimulate the economy — could be as low as 2.5 per cent, according to some estimates. And that’s just one percentage point above where rates could end up after a fourth hike, McLister notes.

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Besides, amid concerns over growing trade tensions and Canada’s burgeoning household debt load, the market seems to think the current cycle of interest-rate tightening will actually peak sooner, at 2.25 per cent, data from three-month Canadian bankers’ acceptance futures (BAX) and Reuters calculations show.

And even if the BoC continues to raise rates for a little while longer, it will likely take a breather after Wednesday’s increase, said David Larock, a Toronto-based independent mortgage broker told Global News speaking ahead of the rate announcement.

READ MORE: Rent or buy? How stagnating home prices and high rents affect that equation

“I’ve been arguing in favour of [variable-rate mortgages] for the past few months,” he said.
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The spread between variable and fixed mortgage rates has recently widened to between 0.75-0.88 of a percentage point, according to McLister. This means those who choose a fixed-rate mortgage are paying an increasingly large premium for the comfort of knowing that their interest rate won’t change.

When the spread reaches one percentage point, “the appeal of variables tends to increase more rapidly,” McLister wrote in a recent blog post.


But Canadian borrowers already seem rather open to the idea of trying a floating mortgage rate.

Although 77 per cent of current outstanding mortgages have a fixed rate, 45 per cent of homeowners and prospective homebuyers quizzed in a recent CIBC poll said they would opt for a variable rate or at least consider it if they were to sign up for a new loan today.

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Still, “everyone choosing a variable rate today should plan for a one-percentage-point jump in rates from here,” McLister told Global News.

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BoC hike may have little impact on fixed-rate mortgages this time

Mortgage brokers have words of comfort even for Canadians who like the security of a fixed-rate mortgage.

The good news is that fixed-rate mortgages may not move much in response to a BoC hike this time, according to Larock.

“This rate increase has been expected for some time,” he said. And this means financial institutions have already priced in the hike.

READ MORE: Here’s the income you need to pass the mortgage stress test across Canada

In fact, the banks have been quietly lowering the rate they offer on five-year, fixed-rate mortgages to some of their best clients. So-called discretionary rates, which mortgage specialists sometimes offer on an individual basis to well-qualified borrowers, have been declining to 3.44 from 3.49 per cent, on average, since May, according to McLister.

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That’s likely because banks themselves have been able to borrow more cheaply lately, as concerns about trade and the global economy weigh on bond yields.

READ MORE: Canadians underwater – Where, exactly, rising interest rates may leave Canadians in danger of losing their homes

If the BoC surprises the markets by sounding unexpectedly concerned about inflation or overly confident about the Canadian economy, those bond yields could go up after Wednesday’s interest rate announcement, Larock warned.

But bond yields would have to rise significantly “before anybody starts thinking about bumping [fixed-rate mortgages],” he added.

– With a file from Reuters


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