Today, the prime rate is at 3.70%, with consumers becoming increasingly anxious about the Bank of Canada continuing to hike interest rates to battle the inflation rate of 7.7% (vs 2% target). 

Most 5-year fixed-rate mortgages are already over 5%. That means the client’s stress test will be 2% higher than their contract rate (7%). Meanwhile, 5-year variable rates are still under 3.5%. That, in turn, allows borrowers to maximize their borrowing power because the qualifying rate will be lower. 

To calculate the minimum qualifying rate used for uninsured mortgages, it is the greater of the mortgage contract rate plus 2 percent or 5.25 percent. The Office of the Superintendent of Financial Institutions (OSFI) enforces this qualifying rate to help ensure that borrowers can still make mortgage payments if interest rates rise. 

What should I do? Should I pick a variable or fixed rate?

The short answer is that it depends on you and your financial situation.

If you’re more concerned about rising interest rates than borrowing power, maybe a fixed-rate mortgage could be right for you. At the very least, you know your worst-case scenario for the remaining mortgage term. 

If you choose a variable-rate mortgage, you can maximize your borrowing power. The positive side is that you can always convert your variable rate mortgage into a fixed-rate mortgage any time you want. The downside is that if the Bank of Canada were to hike interest rates, your mortgage payments would increase if you were to have an adjustable-rate mortgage. 

The rule of thumb is that for every $100k balance outstanding, your mortgage payment will increase by about $12 for every 0.25% increase to prime. 

Suppose you have a variable rate mortgage with level payments. In that case, your mortgage payment will remain the same even if interest rates rise. The lender uses more of your mortgage payment to cover your rising interest costs and applies less against the principal. The positive part is that you could take advantage of maximizing your borrowing power while having fixed payments. You also can convert it to a fixed-rate mortgage in the future. The downside is that the amortization of the mortgage loan may increase. As a result, you may be in for a surprise when renewal is around the corner, and you find out your outstanding balance is more significant than what you expect. 

If you feel overwhelmed and not sure what to do, and want a mortgage professional to help guide you. Please feel free to contact me at info@torresmortgages.ca or call me at 604-355-3592 anytime.