Bank of Canada drops target rate and Canadian mortgage holders ask: Now what?

#1: Numbers are facts but are not the whole story

I renewed my mortgage in the fall of 2022. At that time, mortgage rates hadn’t yet spiked but the rate-ascent had started. At the time, I was strongly advised to lock-in a five-year fixed at 4.57%. For context, five-year fixed rates sit around 5% today.

It was great advice. But I did not take that advice.

As a single mom, I was solely responsible for making this mortgage payment. Psychologically, I struggled with giving up the lower monthly payment that the lower variable-rate mortgage offered me, at that time.

I voiced my fears, and my mortgage broker made a wise suggestion: Split the mortgage. Put half of the mortgage into a five-year variable-rate mortgage at 3.47%, and the other half into a fixed-rate mortgage at 3.99% for two years (the most competitive rate available to me at that time).

What was the advantage? The fixed portion shielded half my mortgage payment from potential rate increases, while the variable portion allowed me to make a lower monthly payment.

In hindsight, it’s easy to see how opting for a fixed rate and aggressively using pre-payment options would’ve been the smart strategy. However, my decision to take on a mortgage wasn’t led by a desire to reduce my housing costs in some unknown future. My motivation was to provide a stable home for me and my children — and that meant that keeping monthly payments manageable as a single-income homeowner, topped the criteria list.

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#2: Short-term pain vs. long-term gain

Now, before you go criticizing, I’m fully aware that my decision two years ago to not lock in to a fixed-rate mortgage for five (or more!) years wasn’t the best. I admit it: I picked short-term gain over long-term pain and I did it with my eyes wide open.

What do I mean? Two years ago, when faced with lower monthly mortgage payments versus higher payments for more security, I chose lower monthly payments.

Then interest rates started to rise. These rate increases hit me hard. I watched in horror as my five-year variable rate increased from 3.47% to 6.67% — prompting a trigger rate reset that added another 65 years to my mortgage term. That lower variable-rate payment is now $500 more each month — a budgetary rate hike I did not expect — and the penalty to break that portion of my mortgage has also increased.

Yes. I realize now that I should have heeded my mortgage broker’s strong, informed, and expert advice. But given the same situation and armed with the same knowledge, I know I’d make the same decision. Why? Because it prioritized my needs at that time.

As a newly single mother, I worried about higher mortgage payments. What if I lost my job? What if I had an illness? What if my kids needed me? While mathematically I lost out, emotionally, I needed the wiggle room. Given my life circumstances at that time, I needed to know there was room in the budget for emergencies; I needed to secure my emotional and mental needs with an eye toward my financial goals.

Looking back, I realize now that my mortgage broker helped me. The suggestion to split my mortgage helped me find wiggle room in my budget — short-term gain — but also minimized the eventual impact that came from rate increases — long-term gain.

Imagine what my payments would have been had the entire mortgage been in a variable-rate mortgage?

Impact of BoC rate cut on short-term gain or long-term pain decision

Fast-forward to June 2024, and for the first time in four years, the BoC cut its overnight rate. How does this affect those renewing their mortgages or first-time home buyers shopping for a mortgage?

This rate cut announcement means relief. So, what would I do now that my 3.99% fixed rate mortgage is up for renewal come fall? If I move lenders I have to break my variable mortgage, that still has three years left on the contract. If I stay with my current lender I have the option to keep my variable.

So what am I going to do?

I’m going to wait as long as possible in the hope that rates come down again. Based on that hope, I could lock-in a fixed-rate for both portions of my mortgage in a two to three year mortgage contract, depending on the rates available, at that time.

By waiting, I insulate myself from overpaying on the fixed-rate portion while rates make a slow descent. It also allows me to consolidate my mortgage (and avoid the headache and stress a split-mortgage comes with). It’s a conservative hedge, and it’s what is in my comfort zone.

#3: The right decision for you is not the right decision for everyone

One of the big reasons I chose a variable-rate mortgage is that I truly believed that the short-term pain of fighting inflation would eventually disappear. The Bank of Canada doesn’t want to keep rates artificially high if it hurts the economy; the BoC just wants to curb inflation. I was convinced that rate hikes would stop and that rate cuts would eventually happen. On June 5, 2024, the BoC took the first step to proving this assertion to be true.

But my heel-click at this news needs to be tempered. A few months ago, when discussing my options with my financial advisor, she reminded me that even with a rate decline, the BoC and the banks were simply not going “to drop it like it’s hot.”

What does this mean for me, as a single-income earner about to renew a mortgage?

Despite the advice and insight from bankers, accountants, financial advisors, family and well-meaning friends, I need to pick a mortgage that works best at meeting my financial limits and addressing my emotional needs.

This doesn’t make my choice the right choice — and it certainly is not the right choice for everyone — but it was the best option for me based on my finances. For me, choosing the uncertainty of a variable-rate mortgage offered a comfortable financial buffer — and I’d make that same decision again, with the same information I had at the time.

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Bottom line

The Bank of Canada’s announcement is the first ‘good news’ announcement for mortgage holders in years — and I did a heel click when the news broke.

Talking to my mortgage broker, I know there are options in the marketplace — with the potential for additional options coming in the following weeks. The question now is whether I should lock in the portion of my mortgage that is up for renewal with a fixed rate of 5.35%, lock in my variable rate at the same time or keep them both variable with the expectation of further rate reductions.

It’s why the BoC announcement should be taken as both a teaspoon of sugar and a tablespoon of salt. The right mortgage decision isn’t just about the math. I’m a single mom. I need predictable payments, and fixed-rate mortgages offer that stability. Given what I’ve experienced, this detail weighs heavily on me and will certainly influence what I do when I renew my mortgage.

I’m not alone. Many homeowners are faced with this decision, and we all have to look at the numbers and weigh them against our needs. Only then can we make the right decision.

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