As a result of inflation and skyrocketing interest rates, the mortgage interest cost index has exploded by 44% since January 2021, due to the explosion in the key rate of the Bank of Canada which went from 0.25% to 5%.
Just before the start of the tightening of monetary policy by the Bank of Canada from March 2022, it was possible to negotiate a 5-year variable rate mortgage at a rate of 2.45%. Today, the rate for this term stands at 7.2%.
Per $100,000 of mortgage amortized over 25 years, the monthly payment increased from $445.48 to $712.81. Eh yes! Nothing less than a cost explosion of 60% in the case of this popular mortgage term based on the preferential rate of banks and credit unions.
Per year, we went in the space of a short time from a mortgage bill of $5,346 to $8,554, or an additional $3,208 per $100,000 of mortgage. Renewing a $300,000 mortgage today comes to $25,662 per year, or $9,624 more than two years ago.
WHAT TO DO?
The “official” mortgage rates are currently as follows:
- 5 years variable: 7.20%
- 1 year fixed: 7.84%
- 3 years fixed: 6.99%
- 5 years fixed: 6.84%
Of course, there is a way to negotiate a lower mortgage rate with banks and credit unions, like 0.5 to 1.5 percentage points lower than the official rates.
- Listen to the economy segment with Michel Girard via QUB :
Now, which term should we choose? Before the start of the rate increase in March 2022, it was strongly recommended to opt for the fixed term of 5 years, minimum. One thing is certain, at the time the term variable had to be avoided even if it was clearly weak.
Today, you should ideally opt for an opposite strategy. Forget fixed terms of 3, 5 or 7 years. It is rather the term “5 years variable” which becomes relevant.
For what? Because interest rates have arguably reached their ceiling. And that the Bank of Canada should this year begin to reduce its key rate, which will have the effect of dragging the entire structure of bank rates down from their current levels.
Given that the variable rate mortgage will follow the prime rate, and that the latter will fall in line with the reduction in the Bank of Canada’s key rate, it is the ideal mortgage option. Provided, of course, that the rate cut forecasts of economists and financial analysts materialize.
A warning is in order. We absolutely should not expect the Bank of Canada’s key rate to fall as quickly and sharply as the upward surge we experienced in the space of 16 months, between March 2022 and July 2023.