Despite the Bank of Canada holding its key interest rate steady for the 29th consecutive time since September 2010, a recent CIBC poll conducted by Nielsen finds that nearly half of Canadians don’t think low rates will last forever and expect mortgage rates to be higher a year from now.
The poll also shows that Canadians are increasingly focused on moving to fixed-rate mortgages.
“Even though we’ve had a relatively stable rate environment for a number of years, Canadians are being prudent when it comes to mortgage planning and are factoring in the possibility of higher rates in the near future,” said Barry Gollom, vice-president of secured lending and product policy at CIBC.
“With fixed rates near historic lows, Canadians see an opportunity to lock in for a number of years in order to reduce the risk of expected higher interest costs,” he added.
In its recent monetary outlook, the Bank of Canada said it is of the view that interest rates should remain where they are and the bank will continue to monitor economic and inflation data closely to determine the direction of future policies.
Canadian private sector forecasters widely believe that the Bank of Canada will not begin raising the overnight lending rate until well into 2015.
The key highlights of the poll include:
• Forty-seven per cent of Canadians think mortgage rates will increase in the next 12 months, up from 38 per cent who felt that way last year.
• Forty-eight per cent would choose a fixed-rate mortgage if they had to make that decision today, the fourth year in a row that fixed mortgages have been the choice of Canadians.
• Thirty-one per cent would choose a variable-rate mortgage today.
• Nineteen per cent were undecided as to which type of mortgage they would choose.
With interest rates as low as they are now, homeowners can take advantage of the opportunity to accelerate their mortgage payments. For example, one strategy is to set your mortgage payment at the amount it would be if rates were one to two per cent higher.
Not only will this help pay down the principal faster, but it prepares you for future rate increases, according to Gollom.
The poll also revealed that younger Canadians were even more likely to choose a fixed mortgage, with 56 per cent of Canadians aged 25 to 34 saying they would lock in to a fixed rate today, a number that has been steadily increasing over the last four years.
In contrast, more established homeowners (aged 45 to 54) were among those less likely to lean towards a fixed rate (43 per cent).
“For those that have recently taken out a mortgage, and may have additional expenses or hold other debt, the predictability of a fixed mortgage rate may be more appealing,” said Gollom. “However those who have paid off a sizeable portion of their mortgage are likely less sensitive to rate changes.
“As part of any long-term mortgage strategy, homeowners at all stages should consider their tolerance for fluctuating rates when deciding on whether to choose a fixed or variable rate, as both have their place,” he added.
With nearly one-in-five Canadians undecided about which type of mortgage rate they would choose, it highlights the importance of talking to an advisor to understand your options.
“Although deciding between a fixed and variable rate is an important component in selecting a mortgage, there are other factors to consider, such as flexible repayment options,” said Gollom. “An advisor will look at your overall financial picture, and help you select the right mortgage for you.”
The Bank of Canada’s global economic growth outlook remains upbeat despite softer readings in recent months that it attributes to “unusual weather” in the United States earlier in 2014. The bank still expects that investment and exports will outshine consumer spending as the main driver of Canadian economic growth as the United States economic recovery gains momentum.
While the bank raised its inflation forecast, it expects the increase to be temporary and made it clear that it would not react by raising rates sooner than previously anticipated.