Interest Rates Increasing – Time To Refinance?

For those of us who have been paying attention to the market, the times of record-low interest rates are over. Back in March, the Bank of Canada made its first adjustment to the overnight rate since the pandemic by raising the rate by 0.25 per cent. Then, a couple of weeks ago, the Bank of Canada increased the overnight rate again by 0.5 per cent. We are looking at yet another raise from all indications as the government seems to cool the red-hot housing market and curb rising inflation across the country.

However, for those with a mortgage, the question is, is now the time to refinance?

It will depend on your specific situation, but here are a couple of things to consider when looking at if it is time to refinance.

In the last 12 months of your mortgage

If you are paying down a fixed-term mortgage in the last twelve months of your mortgage, you are already paying a higher interest rate than those who secured a rate during the pandemic. Five years ago, the average interest rate for a five-year fixed term was around 4.64 per cent. However, today’s five-year rate is about 3.5 per cent to 4 per cent, depending on the bank. So, if you will have to remortgage at the end of your term in a few months, it may be worth looking into the costs to do it early. There will be some penalties, but you might not face a high price to remortgage, depending on the exact wording in your agreement. Plus, by all indications, the Bank of Canada is looking to increase the overnight rate again in the coming weeks, so now is a great time to lock in something lower.

If you have a variable rate mortgage

It might be time to consider locking in a fixed rate for those homeowners who took advantage of the low-interest record rates or have been riding the low-interest rates since the pandemic. Although it is tough to predict, the interest rate should continue to rise as the Bank of Canada continues to curb the inflation we see across Canada. With that in mind, today’s fixed rate could quickly become a better rate than even those with a variable rate mortgage in the coming months. However, we should note that flipping a variable-rate to a fixed-rate mortgage can be challenging depending on your lender. So, you may end up paying a little more than you would expect if you were shopping around for a brand-new mortgage. Either way, the long-term interest savings could undoubtedly be worth it if the interest rate continues to climb as many expect.

The interest rate is not usually this low

Although it may seem like the distant past, the interest rate being above 5 per cent was long the norm in Canada. In fact, from 1980 to 2013, the prime interest rate on a five-year fixed term mortgage was above 5 per cent. Consider this at the turn of the millennium, 8.3 per cent was considered a steal for a five-year fixed term mortgage. At least say, locking in at a sub-four per cent five-year fixed term might seem like a deal in the coming years. No one can predict how things will change between now and 2027 but having a historically low-interest rate locked in is never wrong, especially when you consider your interest is on a loan of hundreds of thousands of dollars.

If you are looking to tap into your home equity

Last but certainly not least, a good reason to think about refinancing with the lower interest rates right now is to finance a large purchase via your home’s equity. Unlike other options out there, a refinance with cashback can provide an excellent opportunity for you to pay for your son or daughter’s college expenses or finally do that home renovation you have been putting off. Locking this increase to the mortgage by tapping into the home equity may be a great option, especially if you have already planned a more extensive renovation in the coming years.

However, although it is nice to have all that money in the bank, do be forewarned those renovations are an expensive endeavour. Currently, with inflation and other factors such as material pricing, renovations are between 5 and 10 per cent more costly than pre-pandemic. This can mean that the once $50,000 to $60,000 bathroom reno is now pushing $75,000. So, no matter what you have in mind, you will need to be mindful of the actual cost and see if that is worth paying the penalties to get out of your mortgage a little earlier than expected.

To wrap it up, here are the five big things to takeaway

  • A remortgage might not be suitable if you have to pay massive penalties or fines
  • It is not normal for mortgage rates to be below 5 per cent
  • A remortgage is a great thing to look at if you are nearing the end of your five-year term or variable term
  • A remortgage might be a good idea if you have a planned renovation in the next few years
  • The Bank of Canada is expected to raise rates again and continue to help bring down the inflation currently gripping the country

So, if you are thinking about a remortgage, it might be time to move. The Bank of Canada last raised the overnight rate on April 15, and by all indications, they will do it again soon. So, to take advantage of the current rate, you will need to move fast. As with any financial decision, it is always best to chat with a certified financial advisor, financial institution or a local mortgage broker. At the end of the day, the best thing for you might be to remortgage or might be to wait. However, either way, it is always a good thing to check in and see how you are doing and how you can best take advantage of the current offerings on the market.

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Smarter Loans Staff

The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada's highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the "GPS of Fintech Lending" by the Toronto Star in 2019.