In anticipation of the Bank of Canada’s meeting on the 7^th of September, I am writing this to discuss what I believe will happen, and my suggestions moving forward. Let’s start on a high note – the inflation rate came down from it’s previous high of 8.10% to 7.60% in July and hopefully this means we’ve seen the peak of inflation and that it’s heading towards the “neutral rate” of 2% where the Bank of Canada would like to see it. I think that this is an important psychological milestone for us to see the rate hikes that we’re enduring finally have some of the desired effect on inflation. Furthermore, we’ve seen the 5 year bond yield also drop from it’s previous high of 3.59% in June to 3.27% (Aug 30^th). The Canada bond yield is important to note as it is directly correlated to fixed rates. If the bond yield goes up, so do fixed interest rates “most of the time”.

Now for some sobering news. In a report released directly after it was announced that the inflation rate has dropped, Tiff Macklem, Govenor of the Bank of Canada, stated that, “inflation in Canada has come down a little, but it remains far too high” and that it will, “remain too high for some time”. Furthermore, that “half of the goods and services that make up the CPI basket are rising faster than five per cent”. Pretty much, oil prices have come down, which reduced our inflation number, but everything else is still going up. He believes, which does make sense, that by increasing borrowing costs, people will be less likely to furiously spend and start saving, which will reduce demand and allow supply to catch up. In conclusion, he writes, “we know our job is not done yet — it won’t be done until inflation gets back to the two per cent target.”

Therefore, we can assume that we won’t see interest rates begin to drop till we see inflation reduced to 2%. Keep in mind, though, that this is the same person who told us in late 2020 that interest rates would remain low till 2023.

In conclusion:

1. I’m expecting that the Prime rate will continue to increase by another .50% – .75% on September 07^th, 2022, but hopefully this is the end of big Prime rate increases. This would fall in line with what the Bank of Canada was projecting earlier in the year.
2. I’m having a hard time believing that we’re going to see a reduction in our overall cost of living till the mid to end of 2023.
3. Most of my clients interest rate is still quite low (3.50% to 4.20%) and they’ve been saving money for some time now, as fixed rates have been sitting above 4% since February.

Where rates are at today (Aug 23^rd): 

1. 1 year fixed – 5.04%
2. 2 year fixed – 5.29%
3. 3 year fixed – 5.54%
4. 4 year fixed – 5.59%
5. 5 year fixed – 5.29%
6. 5 year variable – Prime – .40%​

My suggestion: If you’ve got a Prime rate discount of .50% or greater, I still feel it’s best to hold off. Your rate is still lower than any option available and I’m confident that we should see rates start to come back down in 2023. Humbly, I think it’s fair to say that if you’ve got a mortgage between January – May of 2022, short term, you may have been better taking a fixed interest rate, but remember the benefit of being in a variable:

• You can take advantage of a downturn in the market
• Your penalty to break your mortgage is substantially less than in a fixed rate
  • Quick fact: 60% of people break their mortgage within 3 years

What you can do if you’re feeling the pinch: 

1. Refinance into a 1, 2 year fixed interest rate, but know you’ll pay a 3 month interest penalty to do so. The strategy here is that rates are likely to remain high for a year to two. Therefore, by locking into a 1 or 2 year fixed interest rate now, you’ll know your payment and not have to worry about Prime increasing. Then, once we reach the end of your term, we can renew you into “hopefully” lower rates.
2. Take a good and hard look at your budget, and see what you can do to save money and cut costs.
3. Refinance and extend your mortgage out to 30 years in order to reduce your monthly payment.
   • This option comes with costs such as legal fees, and a 3 month interest penalty, but know they can be included when we restructure.

Helpful articles: 

1. Where are interest rates headed for the rest of 2022?
2. Bank of Canada “Determined” to Eliminate High Inflation: Tiff Macklem writes – Rate Hikes coming.
3. Rate hike will end sooner than markets think: Rosenberg

As always, I’ll do my best to keep you up to date with any news that may be helpful, but please book a meeting with me if you have any further questions or would like to discuss your mortgage in greater detail. And if you found this useful and know anyone that it could help, please pass it on!