In the ever-evolving landscape of the Canadian housing market, prospective homebuyers face a crucial decision when choosing the type of mortgage that best suits their financial goals. Among the various options available, adjustable-rate mortgages have garnered attention, particularly with recent forecasts indicating a potential decline in interest rates over the medium term.

In this article, we will explore the pros and cons of adjustable-rate mortgages in the current market context, based on the Canadian mortgage interest rate forecast from 2023 to 2028.

Pros of Adjustable-Rate Mortgages

Let’s delve into the pros of adjustable-rate mortgages and explore why they are capturing the attention of homebuyers in today’s market.

Initial Lower Interest Rates

One of the most alluring features of adjustable-rate mortgages is the lower initial interest rates they offer compared to their fixed-rate counterparts. According to the forecast, variable and short- to medium-term fixed mortgage interest rates are anticipated to decline over the medium term. As a result, borrowers who opt for ARMs may secure a mortgage at a lower interest rate during the initial period. These lower rates can translate into tangible savings for borrowers, particularly in the early years of the mortgage. With lower monthly payments, homeowners may find themselves with more disposable income that can be allocated toward other financial goals or investments.

Potential Savings

The opportunity for savings is a compelling aspect of adjustable-rate mortgages. During the initial fixed-rate period, debtors can benefit from lower interest rates, leading to reduced monthly payments. This can result in significant savings, especially for those who plan to own the property for a relatively short period or expect their financial situation to improve shortly.

These early-stage savings can be strategically utilized to bolster savings accounts, invest in other assets, or pay down higher-interest debts, thereby optimizing overall financial health.

Opportunity for Rate Drops

One of the most advantageous features of adjustable-rate mortgages is their ability to adapt to changing market conditions. As the forecast predicts a potential decline in interest rates over the medium term, borrowers with ARMs may be in a prime position to benefit from these fluctuations.

Should the forecasted interest rate decline materialize, borrowers could enjoy a reduction in their monthly mortgage payments when the rates adjust downward. This flexibility to take advantage of favourable market conditions makes ARMs an attractive choice for those who believe that rates will decrease in the future.

Shorter Commitment Period

For homebuyers who envision changes in their financial situation or plan to sell their property within a few years, adjustable-rate mortgages offer a shorter commitment period. ARMs typically come with initial fixed-rate terms of 1, 2, or 3 years, allowing borrowers to enjoy the stability of a fixed rate during the specified period.   With a shorter commitment period, borrowers can tailor their mortgages to align with their life plans and financial goals. This flexibility may appeal to individuals who anticipate relocations, career changes, or other life events that could impact their housing needs.

Cons of Adjustable-Rate Mortgages

As with any financial product, ARMs come with their fair share of risks and challenges. Let’s explore the drawbacks of adjustable-rate mortgages to make better decisions and navigate the housing market’s uncertainty.

Uncertainty and Risk

The first and most significant drawback of adjustable-rate mortgages lies in their inherent uncertainty. Predicting interest rates with certainty is virtually impossible, as economic conditions are subject to change. While current forecasts suggest potential rate declines, there remains the risk that rates may increase instead. A rise in interest rates could lead to higher monthly mortgage payments for borrowers with ARMs, potentially straining their financial capabilities. 

The Canadian housing market is influenced by numerous factors, such as inflation, GDP growth, international trade dynamics, and geopolitical tensions. These variables are highly dynamic and subject to change, making it challenging to accurately predict interest rate movements. 

Lack of Stability

Unlike fixed-rate mortgages, where borrowers enjoy stable monthly payments throughout the loan term, ARMs offer no such predictability. The variability in interest rates can create uncertainty for borrowers who prefer predictable and steady financial planning.

For individuals who rely on strict budgeting to manage their finances, the fluctuating nature of adjustable-rate mortgages may prove to be a source of stress and financial insecurity. Knowing that their mortgage payments could change periodically can make it difficult for borrowers to plan and allocate their resources effectively. 

Limited Budgeting

Budgeting for future mortgage payments becomes challenging with adjustable-rate mortgages. As interest rates are subject to adjustments, borrowers may find it difficult to accurately project their financial obligations in the years ahead.

This lack of predictability can be burdensome for borrowers on tight budgets or those with uncertain income streams. Sudden increases in mortgage payments due to interest rate adjustments could strain their ability to meet other financial responsibilities, leading to financial stress and potential difficulties in meeting their mortgage obligations.

Refinancing Costs

Should borrowers decide to switch to a fixed-rate mortgage in the future to avoid potential interest rate hikes, they may incur substantial refinancing costs. Refinancing typically involves application fees, appraisal charges, legal fees, and other associated costs, which can add significantly. 

For some borrowers, the desire to switch to a fixed-rate mortgage for greater stability and predictability may be outweighed by the financial burden of refinancing. This highlights the importance of carefully considering long-term housing plans and financial goals when choosing the type of mortgage that best suits individual circumstances. 

Potential Rate Caps and Margins

Some adjustable-rate mortgages come with rate caps and margins, which limit the extent to which interest rates can adjust. While these caps can provide a level of protection against sudden rate hikes, they may also result in less favorable adjustments if market rates decline significantly. In scenarios where market rates decrease substantially, borrowers with capped ARMs may not fully benefit from the potential cost saving offered by lower interest rates. This can make ARMs less attractive in a declining interest rate environment. 

Adjustable-rate mortgages can be a suitable choice for certain borrowers in the current market, especially those who expect interest rates to decline and plan to sell their property or refinance before the adjustment period. However, they come with inherent risks, such as uncertainty in future interest rates and potential payment fluctuations. Borrowers considering ARMs should carefully assess their financial situation, risk tolerance, and long-term housing plans before making a decision.

Mortgage Calculator: To better understand how an adjustable-rate mortgage might work for your specific situation, you can use our mortgage calculator. Please note that the mortgage calculator provides an estimate and should not be considered as financial advice. For professional advice from Cashin Mortgages specialists can help you make informed decisions that align with your financial goals and risk appetite in the ever-changing Canadian housing market. As the market evolves, staying up-to-date with the latest data and forecasts is crucial for making sound financial choices. 

The Bank of Canada‘s recent decision to increase its key interest rate has sent shockwaves through Canada’s housing market, disrupting the rebound it was experiencing. In an unexpected move, the Bank of Canada announced a 25-basis-point increase in its key interest rate to 4.75 percent on June 7.

Home prices, which were recovering faster than expected, are now under pressure due to this rate hike. In this article, we will explore the implications of the rate hike on variable borrowers and discuss important considerations for those navigating the mortgage market.

Factors Influencing the Bank of Canada’s Decision 

The Bank of Canada’s decision to raise interest rates is influenced by multiple factors beyond the housing market. The overall performance of the economy and inflation targets play a significant role in shaping these decisions. This move is a response to recent data suggesting that the economy is still running hotter than desired. 

Despite the Bank’s efforts to slow the economy, Canada’s labour market remains resilient, adding 41,000 jobs in April. Additionally, the national housing market is showing signs of revitalization after a months-long slowdown.

The Bank mentioned in its statement that it considers the current monetary policy “not sufficiently restrictive” to restore the supply-demand balance and push inflation back towards its 2 percent target. 

While the rate hike was not entirely unexpected, with about one in five economists surveyed by Bloomberg predicting an increase, it does signal a departure from the Bank’s recent stance. Swap market traders had already factored in the possibility of a rate hike by fully pricing it in before the Bank’s announcement, expecting a rate increase by July 12, the date of the Bank’s next scheduled decision.

The Rate Hike’s Effect on Housing Market Recovery 

The housing market had shown signs of stabilization, with notable increases in sales and benchmark home prices in major cities like Toronto and Vancouver. However, the rate hike has raised concerns about the sustainability of this recovery. Industry experts, including James Laird of Ratehub.ca, have expressed their concern about the impact of the rate hike on housing sentiment and the increased stress it will place on borrowers.

Immediate Impact on Variable Rate Borrowers 

Variable rate borrowers will be the first to feel the impact of the rate hike. For example, a homeowner who put 10 percent down on an average-priced Canadian home in April could face an additional cost of $98 per month or $1,176 per year in mortgage payments due to the rate increase. This financial burden may require borrowers to reassess their budgets and potentially seek alternative solutions.

Considerations for Variable Borrowers

1. Consulting with Mortgage Agents: Variable borrowers should consider consulting with mortgage agents who can provide guidance on navigating the changing interest rate environment. These professionals can assess individual circumstances and explore options such as refinancing or switching to fixed-rate mortgages, helping borrowers make informed decisions.
2. Reevaluating Financial Plans: The rate hike highlights the importance of reassessing financial plans. Borrowers should analyze their current and future financial capabilities to accommodate increased mortgage payments. This evaluation will help ensure that mortgage obligations remain manageable and align with long-term financial goals.
3. Monitoring Market Trends: It is crucial for borrowers to stay informed about market trends, economic indicators, and the Bank of Canada’s announcements. By staying proactive and up-to-date, borrowers can better anticipate and prepare for potential future rate changes, allowing them to adjust their strategies accordingly.

Future Rate Expectations 

While the rate hike was not entirely unexpected, borrowers should be aware that interest rates may continue to rise in the future. It is essential to monitor economic conditions and the Bank of Canada’s future announcements to make well-informed decisions about mortgage strategies. Understanding market trends and potential rate adjustments will help you navigate the evolving landscape successfully.

Don’t let the recent rate hike disrupt your financial plans. Contact Cashin Mortgages today and let us assist you in reevaluating your mortgage strategy. Stay proactive and stay ahead of potential future rate changes by monitoring market trends and staying informed about the Bank of Canada’s announcements. Together, we can navigate the evolving landscape and ensure your mortgage obligations align with your long-term financial goals. Take control of your mortgage journey with Cashin Mortgages. Contact us now at 416 655 2274.

Source: 

https://financialpost.com/real-estate/mortgages/bank-of-canada-rate-hike-stomped-housing-market

https://www.mpamag.com/ca/mortgage-industry/market-updates/bank-of-canada-announces-new-rate-hike/448537

https://www.bankofcanada.ca/