Bank of Canada Rate Announcement – Dec 2021

Good morning,

No real change in messaging with the Bank of Canada’s interest rate announcement this morning.  No change to rates.  No indication they’ll be moving up their guidance to be looking to raise rates in the middle quarters of next year.  That said, the risks appear to be to rates going up sooner than expected as markets are pricing in 1 rate hike in March but that is obviously something that can change.

I’ve gotten a lot of inquiries from clients in the last month in variable rate mortgages wondering if they should lock in.  Yes, rates are going to start going up next year but that, in itself, isn’t a reason to lock in.  It’s a question of how many rate increases & how quickly we will get them that determines whether locking in makes sense. 

Right now, variable rates are significantly below fixed rates.  Last year we had fixed rates close to 1.5%.  Going fixed was extremely compelling.  Right now fixed rates are close to 3%.  Compared to current variable rates you’re 5-6 Bank of Canada rate increases (1.25-1.5%) away from that.  The last rate hike cycle saw 5 increases & it took 1.5 years to get there.  If you are concerned about rates going up & lock in, you’re guaranteeing those rate increases immediately vs being able to save a significant amount over the next 2 years let’s call it & for that to pay off, you not only need those 5-6 rate increases but continued increasing beyond that point.  

If you lock in, you also immediately take on the risk of a higher mortgage penalty & if you are like the overwhelming majority of Canadians who break their mortgages early, that’s not a good thing.  

As well, locking in a variable you lose any potential benefit of being able to ride rates back down if the economy slows & we enter a recession.  There is a nimbleness to the variable rate that is a big reason why it’s been the better play close to 90% of the time so keep that in mind & if you’d like to talk about your specific situation please get in touch. 

The one topic that often comes up is the 70s, 80s & early 90s when we had double digit mortgage rates & concerns we could get back to that.  Well, back then there wasn’t anywhere near the same amount of government & private debt as we have now so the economy could handle significant rate increases.  Completely different story today.  A 1% rate increase today has a much larger impact than it would have in, say, the early 80s.  

Rates going up can strike fear into a lot of hearts but when you start to look at what that could actually mean, it’s often not as scary as you think.

That wraps up the last of the Bank of Canada rate announcements for the year so I wanted to thank you for watching & wish you & your families a very Merry Christmas & if you don’t celebrate Christmas, a very happy holiday season : )​​​​