What are the best mortgage rates in 2022? How to choose which is right for you?
Canadian property investors’ decisions on their mortgages depend on the rate forecast. Since the consequences can lead to thousands of dollars in interest savings, it is worthwhile to investigate how the economy affects mortgage prices and how you can reduce your risk against mortgage increases.
At the beginning of COVID, the Bank of Canada reacted quickly. It slashed interest rates to cushion the blow so lenders could continue supplying credit to households and businesses.
Historically, what goes up must come down, and the reverse is true. Therefore, it was no surprise that low-interest rates didn’t last, and inflation increased when the Canadian economy rebounded from the pandemic.
The global economy and its effect on Canada
The world’s finances are interconnected. Interest rates in Canada react to what happens in other parts of the world. The war in Ukraine and China’s zero-COVID policy drove up energy and commodity prices; however, the demand for goods and services is starting to exceed production. This demand puts pressure on inflation, resulting in the Bank of Canada (BOC) raising interest rates three times from March to June 2022.
The market consensus forecast is that the BoC will increase mortgage interest rates by another .75% in 2022 to a high of 3.25%.
It’s not all bad, though; higher interest rates indicate strong economic growth, while weak growth reflects lower interest rates. In 2022, inflation reached the highest level in 40 years, while unemployment reached an all-time low of 4.9%.
When interest rates rise, the economy slows, causing higher unemployment and lower wage growth. Add in higher interest rates, higher material costs, labour shortages, and home ownership becomes more challenging with potential homeowners choosing to rent.
There’s a problem, though, Canada is in a housing crisis. According to CMHC’s Canada’s Housing Supply Shortages: Estimating what is needed to solve Canada’s housing affordability crisis by 2030, Canada will need an additional 3.5 million housing units. Provinces with the highest need and least affordability are Ontario, BC, and Quebec, although other provinces remain affordable. Currently, the economy is tipping the scales in favour of a landlord’s market.
Mortgage rates can’t rise indefinitely, though, and are expected to stabilize in 2024 due to predicted household home increases and immigration. This upturn should bring housing prices back to a positive growth making homeownership affordable in the near future.
How the banks see your risk factor
Have you wondered why lenders offer different rates to different customers? Lenders face the same question as landlords; whether borrowers can afford to repay the loan. Interest rates determine whether the borrower is considered high or low risk. A high credit score and a large down payment make the borrower attractive to lenders.
How to reduce your risk
Fixed vs. variable
Although some borrowers consider variable mortgages higher risk, as long as they are lower than what you would be paying for a fixed mortgage, you are staying ahead of your mortgage and paying less interest. If you are able to increase your payments, even better. Then, if there is a period when variable and fixed rates are the same, or variable rates are higher than fixed, you could switch to a fixed rate.
If you’re set on a fixed term mortgage, consider a 2-3 fixed rate, which allows you to renew a lower fixed/variable rate rather than being locked in 5 years.
Two additional cost-cutting options are to increase your amortization period or consolidate your debt by adding it to your mortgage, which provides more cash flow.
If you aren’t happy with the rate your lender offers, shop around, and check out the competition’s rates. In addition to the large banks, there are also regional banks, credit unions, and mortgage financing companies. If you get the rate you want from another lender, you can return to your bank and see if they are willing to match the competitor’s rates. Most are willing to negotiate.
It’s important to remember that no crystal ball can predict the economic future with 100% accuracy.
The best advice for investors renewing existing or acquiring new mortgages is to get a rate hold today, then weigh out your options until you make the best decision for your situation.
Do you have mortgage tips you’d like to share with me? I’d love to hear about them; you can reach me at [email protected].
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