Perhaps you have thought recently that purchasing a piece of property is a good time to make that investment. A great factor in your decision will be whether or not the mortgage interest rates will increase. The guiding factor on mortgage rates is the prime rate, which is the best or lowest interest rate a bank will charge to its best customers.
Historically in times when the Bank of Canada prime rates increased about 1% during periods of inflation like we are currently experiencing in this country. At an inflation rate nearly triple its norm, this 1% increase in prime is being predicted. With a Canadian inflation rate at nearly 7%, the experts are saying that it is very likely that the prime could increase by 2% or more.
With the idea that interest rates will be increasing, the next question is do you opt for a fixed or variable interest rate on your pending mortgage. If you feel that the rates will only increase for an extended period, then the fixed mortgage interest rate is the way to go. That way you lock in at the lowest rate now. As interest rates climb, the demand for fixed rates do also.
However, everyone also knows that interest rates are cyclical. That means at some point they will begin to descend. The question then becomes how long before they begin to drop. If you can tolerate the increasing rates for the short term, statistics show that long-term borrowers save money over the duration of the loan with a variable rate.
If you believe that the inflation rate will begin to decline within the next year taking the interest rates down with it, then the best choice is a mortgage with a variable interest rate. However, if you think that inflation will continue to climb, then it is better to lock in a fixed rate.
Of course, another factor is the reason you are buying the property. If you are purchasing a residence where you plan to stay for the foreseeable future, then the variable rate is a good choice. However, if you are buying the property to resell in a short time, or you anticipate another move in your near future, then you may want to reconsider. As inflation increases, there will be fewer people who qualify for new loans. If you want to sell this property within only a few years and you believe that inflation will continue during that time, you will have fewer options to sell and may not be able to recoup your investment.
The best idea is to discuss all of these issues with your mortgage broker.