Mortgage rates will climb at least 1% next year if CIBC is right.
Economist Jeff Rubin expects “a material acceleration in inflation in Canada over the next 12 months.” He thinks that “should reverse the current direction in Canadian interest rates.”
CIBC still feels the Bank of Canada may announce another rate cut this year, however–probably 1/4%. That would bring the BoC’s cuts to 1.75% since December 2007. But Rubin says “markets will be surprised at how rapidly the Bank is compelled to take back those easings.”
CIBC’s call is a timely reminder of the obvious, that interest rates don’t always go down. With so many homeowners choosing variable-rate mortgages these days, it’s important those people realize that they may be faced with a decision in 6-12 months.
As rates go up, so do variable-rate mortgage payments. The exceptions are variable-rate payments that are fixed at closing. Variables are great for most people, but if your budget and equity are tight, it’s possible you shouldn’t be in one at all. At the very least, you should be in a variable mortgage that has fixed payments.
Of course, variable mortgage holders can always lock into a fixed rate, but there’s sometimes slippage. Slippage is when fixed rates go up before you lock them in.
Keep in mind, fixed rates can go up any time. Sometimes your lender will telegraph their rate increases to your mortgage planner, and sometimes they won’t. In any case, lenders will sure as heck not send you an email to give you warning.
Mortgage planners can always try to watch bond yields to give you an early signal, but that’s not foolproof either. (See “Predicting Fixed Mortgage Rates.”) The best mortgage planners in this country are often no better than chance at predicting rate turns. (That’s not an insult. Even economists who get paid a lot more then us can’t do it consistently.)
Of course, in addition to slippage, there’s the challenge of long-term timing. For conversation, let assume you could in fact foresee a 1% increase. You surely can’t see what’s in store after that. What if skyrocketing commodity prices cause a global economic slowdown after you lock in for 3-5 years? Then rates go down but you’re stuck in a crusty fixed rate that’s milking you for extra interest payments. Not good.
The moral is, timing interest rates is for gamblers–the same kind of gamblers that make $400 million a year for Bellagio. If there’s any chance your budget can’t tolerate a 10%+ payment increase, and you’re in a variable, you might not want to wait till the last minute to convert to a fixed rate.
Every case is different, though, so talk to your mortgage planner for his or her thoughts.