How Long Low Variable Interest Rates Will Last?

Today, I would like to talk about the variable interest rates. I will try to provide you with the answers to the most common questions that I was asked by many people: How long will these low mortgage variable rates last? Should you listen to someone telling you to get yourself a lowest variable rate today? What can happen to the variable interest rate in the nearest future? And, should I choose 5 years variable rate over 5 years fixed mortgage rate.

First of all, let’s briefly discuss the reason why variable mortgage interest rates decreased. In 2008, when the Global Economy faced financial crisis, Government had to take steps to stimulate our economy. They wanted businesses to be able to borrow money and continue operate, and to motivate Canadians to buy new homes which would drive the Canadian economy.

The latest reports have shown that housing sales rose 0.7% to an annualized 158,500 units in November 09, extending the general upward trend from 118,500 units in April as builders responded to falling inventories of unsold homes and consumers took advantage of low mortgage rates.

As we can see the low interest rates did stimulate the economy and boosted the housing market to help Canada recover after the financial crisis.

Unfortunately, these rates were not meant to last for a long period of time. It was just a temporary measure to help Canada sustain the economic downturn.

Most likely mortgage holders will see a rate increase within next year already.
Read this quote from the 2009 December RBC Economic report:
”ECONOMIC AND FINANCIAL MARKET UPDATE
December 2009

- The slow start to Canada’s economic recovery suggests that the Bank of Canada will retain its commitment to a 0.25% overnight rate until mid-2010. We expect the first rate increase to come next summer with an additional hike forecast in the final quarter. This will result in the overnight rate finishing 2010 at 1.25%.

- In 2011, as the economy builds momentum, as the unemployment rate falls and the headline inflation rate slips above the 2% target, the Bank will continue to raise the overnight rate, which we estimate will be 3.5% by year-end 2011.”

What does that mean? Basically, a mortgage variable rate could be around 3.25% by the end of 2010 and 5,5% by the end of the 2011. If you are holding a $250000 mortgage at 2% today with 25 years amortization the mortgage payment will increase from $ 1058 to $ 1525 a month. This is 467 dollars increase in your monthly expenses. Imagine having a larger mortgage amount!!!

I and many other financiers recommend choosing fixed mortgage rate for the next 5 years. This is a turning point in our history where fixed rate mortgage can actually save your more money while providing stability.

Take a look at the chart above showing variable rates trend for the last 25 years. Now, they are at the bottom. As soon as economy will show slightly positive outlook, the prime rate will start rising fast.

One may argue, When rates will start rising I will switch my variable rate mortgage to a fixed rate mortgage. The problem is that fixed rate most likely will not be as low as it is today. Depending on the mortgage product, fixed mortgage rates may be relatively cheaper choice two years from now but much higher than now. So, your short term savings today will be offset by the long term loses later.

I hope this will help you make a proper mortgage decision. If you have any questions feel free to contact or post a comment below.

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