Is Now the Time to Lock In Your Mortgage, Amid Rising Rates?

One thing many homeowners with variable rate mortgages are dreading is the reality that locking in a mortgage just got more expensive following the announcement from the Bank of Canada that it would be raising the benchmark interest rate one quarter percentage point to 1% this past Wednesday.

RBC was the first bank to raise its prime mortgage rate from 2.95% to 3.2% after the announcement, with others following suit almost immediately afterwards. With prime rates now adjusted higher, locking in a mortgage for five years has become more expensive for Canadian homeowners who will have to assess whether now is the right time to lock in a mortgage, or if variable is still the way to go.

Variable rate mortgages tend to be the much better option for borrowers in a period of declining interest rates (basically, the past couple of decades). In such a scenario, borrowers are able to take advantage of the downward momentum of interest rates, resulting in lower borrowing costs and increased disposable income over time.

With the Bank of Canada now raising rates two sessions in a row, questions as to the direction of interest rate movements has come the forefront for many homeowners; should the trend continue, the potential impact of rising mortgage rates over time could have a severe impact on over-leveraged Canadians, especially those with large home equity lines of credit (HELOCs), debt vehicles which are also closely linked to the prime rate set by major Canadian lending institutions.

In general, locking in a mortgage after rates have already gone up doesn't make much sense; the government bond markets tend to reflect a pending interest rate increase prior to an actual movement by the Bank of Canada, meaning interest rates tend to adjust much faster than homeowners are able to lock in.

That said, should the Bank of Canada continue its hiking cycle and hike again before the end of the year, many homeowners may be in a situation where they wished they had locked in right now.

Predicting the future is a hard thing to do - that said, while locking in a mortgage tends to allow for a slightly higher premium for the bank over time, the margin of safety afforded to investors may make sense for the more conservative types.

Invest wisely, my friends.

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