Is it time to Switch to a Variable Rate?

The Bank of Canada left The Overnight Rate unchanged last week. As always we need to read into what they said and how they issued their statement to understand what they are thinking and how the market will respond. If you’re looking for the Monetary Report from last week here it is.

We believe there are 2 important takeaways from the Report.

1. Inflation is putting downward pressure on the Overnight Rate.

In the Monetary Policy Report released by the Bank of Canada last week Inflation was the top priority. The Inflation outlook was placed in the first paragraph of the Statement; this is usually reserved for the global outlook. It was also mentioned later in the Report that downside risks to inflation “have grown in importance” (previously they only “appeared to be greater”). This clearly tells us that the Bank of Canada is more concerned with having to drop the Overnight Rate, than increase it. Economists have actually now started predicting a rate cut in the next 6 months (don’t get too excited).
Although we have been advocating the Variable Rate Mortgage for the past 3 years we still do not believe that the Bank of Canada would be foolish enough to decrease rates right now unless growth for Canada was revised downwards significantly.

2. The Canadian Dollar will continue to decrease relative to the American

The Bank made some interesting comments regarding our Canadian Dollar. The Bank stated, “Despite depreciating in recent months, the Canadian dollar remains strong and will continue to pose competitiveness challenges for Canada’s non-commodity exports.” In our early December newsletter we described a situation that would see The Bank of Canada work to decrease the value of our Dollar relative to the USD in an attempt to lift growth in Canada. Although the Canadian economy is getting some help from slightly higher commodity prices we still need to see our non-commodity exports increase in order to see sustainable economic growth.

Based on what the Bank of Canada is telling us it might be time to think about switching to a Variable Rate Mortgage. If you’re thinking about making any changes to your mortgage it is important to consider penalties that might be associated with breaking your existing mortgage and what type of Variable Rate product you are taking with your Lender. Also, it should be noted that all of these comments from the Central Bank are with an aim to boost our economy into growth, which means higher Bond Yields and therefore higher Mortgage Rates. At some point Fixed Rate Mortgages will be higher than where they are today, it is just a question of when.

If you are looking to consolidate some of your higher interest rate debt this could be a great time to look at making some changes to your mortgage.