The Bank of Canada and my mortgage
I have to renew my mortgage in a couple of weeks, but am wrestling with whether to go with a fixed or variable rate. A few months ago, when my credit union called, they guaranteed me a 5.8% fixed rate for three years, with the caveat that if rates went down by the time the current term expired they would give me the lower rate. I said a tentative yes, and this seemed like a good idea as Bank of Canada raised rates a couple of weeks later.
But then the turmoil in financial markets hit, and those jitters have served to somewhat derail the Bank’s obsession with fighting inflation by raising rates. Today’s announcement from the Bank that they are keeping the overnight rate unchanged is indicative of this, when previously everyone (Bank staff included, I’m guessing) had figured on a quarter-point increase.
It would be better for me to go for a variable rate if conditions in the financial markets worsen and the outlook is for a drop in interest rates. My credit union offers a variable rate mortgage, currently at 6.0%, that essentially moves in line with the Bank of Canada’s overnight rate. Back in 2001 we went this path and for three years rode it to ultra-low interest rates, bottoming out at 2.25%. But I would need at least one quarter-point rate cut to make it worthwhile, and it would have to stay below for three years.
On the other hand, it may be that the turmoil in the markets is going to pass, that there will be minimal spillover onto the real economy (as Jim Stanford argues), and the Bank will get back to its hawkish ways. In this case the fixed rate is a better bet to guard against rate increases. In 2004, we went this path and locked in for three years at 4.3%. Given the past six years, a rate close to 6% seems awfully high even though it is still low compared to the 1980s and 1990s.
So, professional and armchair economists, your turn. What path should I take?