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Interest rate uncertainty


The latest economic forecast from the Bank of Canada has rekindled the “age old debate”: Fixed vs Variable.


In its Monetary Policy Report last month, the BoC indicated that the time horizon of its “low for longer” interest rate policy may be moving closer. The Bank had expected to hold its trend setting overnight rate at 0.25% until sometime in 2023, based on its forecasts for inflation.


Now the Bank thinks its inflation target – a sustainable 2% – could happen sometime in the second half of 2022. The Bank cites Canada’s resilient economy, and the most recent GDP numbers tend to bear that out. Statistics Canada reports the economy expanded at an annualized rate of 6.5% in the first three months of this year.


That would suggest that mortgage borrowers might want to go with a fixed rate or consider locking-in their variable rates at today’s lows, avoiding unwanted increases. However, the pandemic continues to cloud any view of the future and uncertainty was a key element in the Bank’s last report.


A number of market watchers point out that variable rate mortgages continue to offer savings and that there are ways to mitigate the cost of rate increases whenever they occur.


Of course, fixed rate mortgages continue to offer the peace of mind that comes with interest rate and payment certainty. The key considerations being possible penalties, and flexibility in the terms.


For borrowers, the message would seem to be: base your decisions on your own circumstances rather than the broad economic considerations of the Bank of Canada.

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