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How Can Fluctuating Interest Rates Affect My Mortgage?

How Can Fluctuating Interest Rates Affect My Mortgage?

There’s a lot you need to know when navigating the world of mortgages. And, if you’re not careful, it’s quite easy to get tripped up in the lingo, the procedures, and the payments. (Not to mention the penalties.)

Which is why we’ve recruited Jerome Trail, owner and broker of record at The Mortgage Trail, to answer the most important questions homebuyers and homeowners should understand before moving forward in their mortgage process.

Today, Trail takes us through the ups and downs fluctuating interest rates can play on your mortgage payments. From five-year fixed to variable-rate mortgages, Trail explains how the greater economy can end up playing a part in your monthly payments — for better and for worse.

As is the case with most things in life, when it comes to locking in your mortgage interest rates, timing is everything.

How Can Fluctuating Interest Rates Affect My Mortgage?

Unless you’ve been hiding under a rock throughout the COVID pandemic (no judgement here), you’ve likely noticed a lot of attention being paid to interest rates over the past 12 months.

Back in mid-July, Bank of Canada Governor Tiff Macklem held a press conference in which he pledged that the Bank’s overnight lending rate of 0.25% would hold until the country’s inflation rate returns to its 2% target and achieves sustainably. That ‘hold’ could end up being years long.

READ: What’s the Difference Between Being Pre-Approved and Pre-Qualified for a Mortgage?

As a result, homebuyers are enjoying access to historically-low interest rates that can easily translate into savings over hundreds of dollars per mortgage payment and thousands, if not tens of thousands, over longer fixed-terms.

So, what does all this mortgage interest rate movement mean for you? Well, that depends.

Fixed Rate Mortgages

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According to Trail, historically, fixed mortgage interest rates have always tended to drop slowly but increase quickly. Traditionally, when fixed rates went up, it was normally a quick occurrence and one that came without much warning to the everyday borrower, as lenders set rates based upon the commercial bond market. Looking back just to 24 months ago, client mortgages in early 2019 were getting locked in five-year fixed rates at 3.79% — and those were considered competitive rates.

In the last year, however, since COVID and the resulting economic fallout (see: precipitous drop in interest rates), home buyers have found fixed mortgage interest rates are now hovering around 2% on the same five-year fixed basis.

On a $500,000 mortgage, the difference between a five-year fixed at 3.79% and 2% would — as it looks — cut the interest portion of monthly payments nearly in half. (In this example, the total difference between these two rates in interest payments on a mortgage over a five-year term is just shy of $45,000.)

In other words, fixating on getting the right rate for your fixed-rate mortgage can result in a massive amount of savings over the next half-decade.

Variable Rate Mortgages 

Unlike fixed-rate mortgages, variable-rate mortgages move up and down according to the Bank of Canada rate. Variable-rate mortgages (also known as adjustable-rate mortgages) are quoted relative to a lender’s prime lending rate, which takes guidance from the Bank of Canada rate.

If you have a fixed-rate mortgage, you do not have to worry about the fluctuations until your term ends and you need to re-sign for another term. If you have a variable-rate mortgage, however, you should expect some ups and downs during your mortgage term — especially in turbulent economic times.

Given how low fixed-rate mortgage rates have dropped over the past 12 months, Trail believes there isn’t much benefit to accepting the risk a variable-rate product carries with it. Which is to say, if you can lock in for five-years at the rate of inflation (or lower!), the security of doing so far outweighs the possible upside a variable-rate could offer you by going a few tenths of a point lower.

As such, The Mortgage Trail has been, for the most part, recommending fixed mortgage rate solutions throughout the current COVID climate.


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