The new 0.5% reduction announced by the Bank of Canada on Wednesday morning should delight many mortgage loan holders and future buyers.
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Now that the rate has fallen below 4%, established at 3.75%, some are wondering whether they should opt for a fixed rate, or keep a variable rate.
“It’s starting to appear in the budget for those who have variable rate mortgages,” says Stéphane Bruyère, mortgage broker, in an interview with LCN.
This new rate reduction represents a saving of approximately $27 per $100,000 of mortgage loan every month, according to the latter.
A narrowing gap
The gap between fixed rate mortgages and variable rate mortgages is narrowing with this new reduction in the key rate.
“Currently, a five-year fixed rate is around 4.5%. The variable rate is around 5%,” explains the mortgage broker.
This lower gap would push the latter to opt for a variable rate.
“Especially when you can convert the variable rate mortgage to a fixed rate without fees. So, personally, I would go towards the variable rate to wait a little for the drop, and then, when we think that we are going to be in a period of a little more stagnation, of economic growth, and then, to simply convert my fixed rate mortgage.”
A new drop to be expected?
The prospect of a further drop in the interest rate in the coming months could also weigh in the balance.
With an adjustable rate mortgage, a further reduction in the prime rate could mean a further reduction in the mortgage rate.
Stéphane Bruyère believes that a further decline is to be expected in the short term.
An opinion shared by several other experts.
“We expect another drop. Theoretically, for us again, the base scenario is for 25 basis points. The bond market is starting to position itself for 50 basis points,” said Jean-René Ouellet, vice-president and investment strategist at Desjardins Wealth Management, earlier in an interview with LCN.
Still high for renewals
For those who have to renew their mortgage loan in the coming months or the next year, this new reduction is a little less encouraging since they usually have a much lower rate.
“I have clients who are renewing, who have mortgages at 2.3%, 2.4%, even clients who are at 1.9%. And then, they have to renew with much higher rates, so there is still a gap for those who currently have fixed rate mortgages,” explains Stéphane Bruyère.
