What Declining Interest Rates Mean to Canadians

Having A Good Understanding of Current Interest Rates

One of the things we like to have a good understanding of for clients is the current interest rates to borrow in the market. Whether borrowing for personal use or for a business, it's important for our advisors to provide meaningful advice when our clients are looking to get access to financing.

Here in Canada, interest rates have remained steady since October 2018, that is until this morning when the Bank of Canada (BOC) cut the overnight lending rate by half a percent to 1.25%. Given the headwinds of COVID-19, slumping commodity prices, and the fact that Canada currently has some of the highest interest rates among developed economies, this came as no surprise.

The Bank of Canada overnight rate has a significant impact on all banks lending operations.  Lower overnight rates typically mean lowering lending rates all around. Think mortgages, auto financing, and lines of credit.

Taking in All The Factors

After todays decision I decided to call a good friend Paul Dueck, who is a mortgage professional with Castle Mortgage Group. He's worked with many of our clients and has provided excellent advice and service for their personal lending needs.  Paul mentioned that with today's best 5-year fixed rates coming in between 2.59% and 2.79% (numbers before BOC rate cut) he's had an influx of clients reaching out to inquire about switching lenders to take advantage of lower rates.  

Paul cautioned me however, that any clients looking to borrow, or refinance need to take into consideration other factors than just the lowest rates. Over the last month we have seen falling fixed mortgage interest rates, and the BOC announcement on Wednesday has started another flurry of rate drops across the board. However, rate is only one small piece of the mortgage discussion.

Making a mortgage decision solely based on rate can be a costly mistake if clients are not fully aware what they are signing up for, especially when it comes to break penalties. All lenders calculate penalties differently, so it is important to review all of the conditions before selecting a term. On average Canadians break or refinance their mortgage term every 3.7 years, yet most clients usually request 5-year terms that come with rate specials. With that being said, both fixed and variable rates are dropping to lows that we haven't seen in years, and now is a good time to discuss getting equity out of your home or signing up for a new term with a lower interest rate.

Fixed Rate vs Variable Option

Another hot topic in mortgages is whether or not to lock in a fixed rate or take the variable option.  I asked Paul to describe the most important factors he advises clients to consider when faced with this common borrowing decision. From a high-level, Paul's advice is to first think about how long you are planning on staying in the home. Terms with variable rates have much smaller break penalties when compared with fixed term mortgages.

It is also important to discuss whether or not a client is okay with having a variable rate with possibility of fluctuating mortgage payment amounts when compared to having a fixed payment amount for the entire term. One of the key reasons we lean to Paul for advice is the fact that he comes to clients with no bias on which lender to use.  His focus is on their personal needs and circumstances. His role is to educate our clients on the solutions available so they're able to select which product fits them best. Paul works with dedicated mortgage lenders that have more options than your typical bank branch.  

Although there are individuals who are able to navigate the world of mortgages without any help from a professional, for most it doesn't hurt to have an expert involved; they come at no added cost and at the very least will keep your lending institution honest on their offered rates.

- Brandt Butt, Investment Advisor, CIM

Brandt Butt is an Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Brandt Butt who is an Investment Advisor for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.