As the bond market projects that the Bank of Canada will begin lowering interest rates this fall, homeowners with variable mortgages are faced with a crucial decision: ride the variable-rate wave or break their mortgage early and move into a cheaper fixed rate. This decision not only affects their current cash flow, but also their safety net and exposure to risk. With the bond market being seen as more accurate in forecasting inflation than the central bank, the stakes are high for those holding variable mortgages.
As the economy navigates uncertain waters, now is the time for homeowners to weigh their options and make a choice that will secure their financial future.
The bond market is a powerful force in the world of finance, and it can often provide valuable insights into the future movements of interest rates. Recently, bond traders have been projecting that the Bank of Canada will start lowering interest rates this fall, which has significant implications for Canadians with variable mortgages.
A variable mortgage is a type of mortgage where the interest rate can fluctuate based on the prime rate set by the Bank of Canada. This means that when interest rates go up, so too do the payments on a variable mortgage, and when interest rates go down, payments on a variable mortgage decrease.
The bond market is seen as more accurate in forecasting inflation than the Bank of Canada, so when bond traders are projecting lower interest rates, it’s a strong indication that this is likely to happen. For Canadians with variable mortgages, this projection has created a sense of uncertainty and concern.
When interest rates are expected to go down, people with variable mortgages have two options: they can do nothing and ride the variable-rate wave, or they can break their variable mortgage early and move into a cheaper fixed rate. Both options have their pros and cons, and the decision ultimately comes down to an individual’s personal circumstances and risk tolerance.
For those who choose to do nothing and ride the variable-rate wave, they will likely see a decrease in their mortgage payments if the bond market’s projections come to fruition. This can be a great option for those who have a good cash flow and a solid safety net in case of unexpected expenses.
However, it’s important to remember that if the bond market’s projections are wrong, and interest rates actually go up, payments on a variable mortgage will also increase, which could put a strain on an individual’s finances.
On the other hand, breaking a variable mortgage early and moving into a fixed rate can provide peace of mind and stability for those who are more risk-averse. With a fixed rate, the interest rate and mortgage payments will remain the same, regardless of the movements of the prime rate. This can be a great option for those who are worried about the potential increase in payments on a variable mortgage if interest rates go up.
However, breaking a variable mortgage early can come with penalties and costs, so it’s important to weigh the pros and cons carefully before making a decision.
Another option for people with variable mortgages is to manage their variable based on their cash flow, safety net and exposure to risk. They can make an extra payments on the principal of their mortgage to pay it down faster.
This will reduce the interest cost on their mortgage, as well as the length of their amortization period. They can also use a line of credit or a cash reserve to make extra payments, but this could affect their credit score.
In a nutshell, the bond market’s projection of lower interest rates this fall has significant implications for Canadians with variable mortgages. Whether individuals choose to do nothing and ride the variable-rate wave, break their variable mortgage early and move into a fixed rate, or manage their variable based on their cash flow, safety net and exposure to risk, it’s important to carefully consider the pros and cons before making a decision. Ultimately, the best decision will depend on an individual’s personal circumstances and risk tolerance. It is always a good idea to consult with a financial advisor to understand the best options available to them.
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