*Updated* Ongoing Bank of Canada Benchmark Rate Announcements

[Weitz]

I wouldn’t be taking a 5 year fixed right now. I don’t have a crystal ball though.

But no one knows your sons finances. Motivations. Etc. to provide any real advice.

[The Fonz]

One would think the BOC will be forced to reduce rates as the economy craters over the next 12+ months

[Geraldsh]

Thanks, it sounds like the bank’s advise may be on target if rates trend towards flat or lower.

[Izzle]

Probably best to take BoC guidelines with a of salt. Last time they said rates would stay low until 2023. This time they're saying that there might be no further rate hikes.

[mrkajz44]

It also depends on the difference between the 2 year rate vs the 5 year rate. I'd imagine there is a pretty wide spread between the two options, so while 2 years is better for flexibility, you could be paying way more for that flexibility.

Personally, I like the longer term mortgages where I know my payment for years to come. I value the avoidance of stress and anxiety as rates move up and down, which doesn't really have a finance value but a value nonetheless.

[MillerTime GFG]

Two year in my opinion is the best timeline right now, but a 3-year tends to make most sense b/c those rates are lower than the 2 in almost all cases.

I'd have him ask for a comparison b/w the 2 and 3 year fixed.

[opendoor]

Originally Posted by Table 5

Anyone know how long it typically takes for banks to adjust their GIC rates after the interest rate increase? I'm looking to lock in a GIC, but wondering if today's rate hike would already have an effect, or if there's a delay.

As bizaro86 mentioned, GIC rates tend to be correlated with bond yields, which are actually dropping right now. So if anything, waiting might be counterproductive. CIBC for instance dropped their GIC rates yesterday, and other places seem to be starting to drop the rates on their longer term ones (2+ years).

It's a combination of the market predicting rate cuts in the next year or two and the fact that money is flowing more towards guaranteed investments (bonds, GICs, etc.) in the face of a possible recession, and that will tend to reduce their yield.

[bizaro86]

**While this is not financial advice** if it was my mortgage up with the current rates I'd probably go for the 5 year IF and only if I was sure I wasn't going to sell in the next 5 years.

The 2 year rate is a fair bit higher than the 5 year rate, and it isn't obvious to me rates will be way lower in 2 years than they are now. They might be, but it's far from a sure thing. Having payments/risk locked in for 5 years adds sleep-at-night value, especially if this is someone's first house, etc.

The big caveat is the not moving, because if rates do happen to drop and you need to break a five year fixed you could be looking at a very large penalty.

[Derek Sutton]

Originally Posted by Geraldsh

My son is shopping for a mortgage and asked for a 5 year fixed rate. The bank advised him to limit the fixed term to 2 years - what would you advise?

Is he renewing his mortgage or getting a new mortgage? I would not advise anyone to buy a home right now.

[pseudoreality]

Originally Posted by Geraldsh

My son is shopping for a mortgage and asked for a 5 year fixed rate. The bank advised him to limit the fixed term to 2 years - what would you advise?

Well, I would suggest doing a risk/reward analysis. Something that I think a lot of people who went variable last year obviously did not.

What can he afford now? What can he afford in 2 years, 5 years?

If he expects his income to rise a bit in the next couple of years or if he has flexibility in his budget, then it might be worth the gamble to go short. However, if he is maxed right out, I would not suggest anything that could result in increased payments in two years.

I'm not making any predictions, but there is still lots of room for rates to go up.

[MillerTime GFG]

Originally Posted by Derek Sutton

Is he renewing his mortgage or getting a new mortgage? I would not advise anyone to buy a home right now.

May I ask why? Rent is 100% interest, and rental prices are increasing, and will continue to increase. Many landlords have variable rates and are now subsidizing their mortgage payments due to being cashflow negative.

[GGG]

Originally Posted by Geraldsh

My son is shopping for a mortgage and asked for a 5 year fixed rate. The bank advised him to limit the fixed term to 2 years - what would you advise?

How sensitive is he to payment changes.

If a 2% increase in interest rate will cause him financial stress then I would lock in for longer. Variable vs Fixed and 2 vs 5 is about risk tolerance and flexibility as opposed to trying to guess what is going to happen next.

So questions like

Is his income going to be higher 2 years from now? If no then the ability to handle rate hikes is lower
Is he planning on selling and not re-buying in Canada? If yes than shorter is better
Can he afford a 2% higher rate at time of renewal?
Can he afford the higher 2 year fixed today?
Are you willing to bail him out if he can afford payments at some point.

In general over the past history of mortgages variable is lower cost. The problem is that we live in a discrete moment in time so on average shorter and more variable should pay off however you have to live with the fluctuations.

Anyway the short answer is don’t try to big the cheapest outcome pick the option with a risk profile you can tolerate.

[MillerTime GFG]

Won't let me quote you GGG, but:

n general over the past history of mortgages variable is lower cost. The problem is that we live in a discrete moment in time so on average shorter and more variable should pay off however you have to live with the fluctuations.

After today's hike, best variable rates will be around 6.10-6.35% depending on the lender (5-year terms), whereas 3-year fixed rates can be found around 4.89%. Haven't seen a spread like that in all my time in the industry. Even if we assume rates come back down in 2024, you're at minimum ~1.30% higher for a year if going variable. Then the question becomes how quickly will the BoC lower rates to make up that spread.

[powderjunkie]

Originally Posted by Izzle

Probably best to take BoC guidelines with a of salt. Last time they said rates would stay low until 2023. This time they're saying that there might be no further rate hikes.

You can rely on tomorrow's forecast a lot more than the 14 day outlook...especially when the forecast is being made in the midst of a hurricane.

But if you want to glom onto 1 headline nugget and ignore the other 7 paragraphs in each and every announcement since then because you don't understand them, then sure, be outraged when it pours rain 11 days later and you don't have a jacket. Totally reasonable. After all, 11 days ago they said it should be sunny today.

[Slava]

Originally Posted by Table 5

Anyone know how long it typically takes for banks to adjust their GIC rates after the interest rate increase? I'm looking to lock in a GIC, but wondering if today's rate hike would already have an effect, or if there's a delay.

Originally Posted by bizaro86

GICs are priced based on longer interest rates (ie 5 year GICs are based on 5 year rates). The banks raise GIC rates more slowly than mortgage rates, but a change to the short rate doesn't necessarily affect the long term rate - it's mostly based on the expectations for future rates.

To this end, rates didn’t increase in December after that rate hike. It’s not a pure correlation between the overnight rate and GICs at all. I would also note that the one year rate is higher than the longer terms, so that might also be a consideration.

[bizaro86]

Originally Posted by powderjunkie

You can rely on tomorrow's forecast a lot more than the 14 day outlook...especially when the forecast is being made in the midst of a hurricane.

But if you want to glom onto 1 headline nugget and ignore the other 7 paragraphs in each and every announcement since then because you don't understand them, then sure, be outraged when it pours rain 11 days later and you don't have a jacket. Totally reasonable. After all, 11 days ago they said it should be sunny today.

I mean, that post wasn't dripping with outrage, it was pretty matter of fact. And the BoC forecast was wrong on the turn in interest rates last time, so counting on them to forecast correctly this time seems potentially unwise, especially given the potential importance of the decision.

Again, it depends on the person and their ability to handle higher payments.

[MillerTime GFG]

So here's a fun fact...

You want a HELOC? You now need to qualify (via the stress test) at NINE POINT TWO PERCENT!

[blankall]

Originally Posted by Weitz

I wouldn’t be taking a 5 year fixed right now. I don’t have a crystal ball though.

But no one knows your sons finances. Motivations. Etc. to provide any real advice.

Fixed is running about 1% less than variable, and variable might raise further, probably by another .25% at some point.

So you're basically factoring in an average 1.25% rate drop. So if rates go up .25% and then remain that way for 2 years, they have to drop a fair bit over the remaining 3 years to make up for that 1.25% difference from the variable rate. They've really set it up so its a very difficult decision.

The problem with picking the variable/fixed rates is that the people setting them know a lot more about and have far more experience with the subject than you or anyone you know.

[Weitz]

Originally Posted by blankall

Fixed is running about 1% less than variable, and variable might raise further, probably by another .25% at some point.

So you're basically factoring in an average 1.25% rate drop. So if rates go up .25% and then remain that way for 2 years, they have to drop a fair bit over the remaining 3 years to make up for that 1.25% difference from the variable rate. They've really set it up so its a very difficult decision.

The problem with picking the variable/fixed rates is that the people setting them know a lot more about and have far more experience with the subject than you or anyone you know.

Did I say anything about a variable?

[blankall]

Originally Posted by Weitz

Did I say anything about a variable?

Same boat with shorter term mortgages. "Discounts" don't really start until the 4 or 5 year range. So if you're getting 1% higher for 2 years, that means to even out you need 2% or more lower for the following 2 years.

You'd be needed a mortgage rate of about 3.5% for years 3 and 4. I'm up for renewal in 3.5 years, so I hope you're right but who really knows.