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Trying to Make Sense of Rate Increases!

Many lenders have raised their interest rates on 5 year and longer fixed rate mortgages.

Why is this happening?

Banks lend more money than they take in through deposits.  In order to meet the demand for customer loans, they borrow money in financial markets. To ensure they are not taking interest rate risk, they lock in the rate on the money they borrow to match the term of the mortgage. For example, a 5 year fixed mortgage is funded by a 5 year fixed rate bond. In May, the rate on longer term bonds started to rise, meaning the banks cost of funds – the cost to the bank of raising the money needed to loan to customers — went up. When they pay a higher rate to borrow in the bond market this reduces their profit margins. This is why rates on the longer term fixed rate mortgages have increased. The relationship between bonds and mortgage rates is not new. Attached is a chart that shows how bonds track closely with mortgage rates. They tend to go up and down together.The good news is that the upward trend in bonds prices is a positive sign that consumer and investor confidence is on the mend.

What does this mean for you? 

For those of you who are in a variable rate and want to switch to a fixed rate, the general rule is as follows: The variable rate mortgage is usually a 5 year term, if you want to switch into a fixed rate in year two of your mortgage term you may switch into a 3 year term (the remaining term of your mortgage) 

Million Dollar Question, should I switch into a fixed rate now? 

This week in the Bank of Canada’s announcement they maintained their overnight target rate at ¼ per cent (prime remains the same at 2.25%) and they reiterated their conditional commitment to hold the current rate until middle of next year – on condition that inflation did not rise above their inflation target. What we are hearing is that the prime overdraft rate should stay the same until next year, what we are seeing is that the longer term fixed interest rates are increasing.  You should be asking yourself; at what point if any do you want to lock into a fixed rate.  Fixed rates are at all time low, we are told this is the bottom – do you want to lock in now loose your good rate or hold on for awhile – at what point will you be ready to switch if at all? 

Tough decision!

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