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Inflation in Canada has been rising steadily throughout 2021 and is now at its highest since 2003. Rising inflation is often followed by higher interest rates, affecting the cost of borrowing for everything from credit cards to car loans and especially mortgages. However, the Bank of Canada has stated that while it will likely raise interest rates in 2022, it won't do so immediately in response to inflation. What will happen if inflation continues to rise? What should you make of the current economic situation if you are a homeowner or hope to be one soon? Fortunately, there are plenty of options, no matter where you are in the mortgage cycle. 

Inflation in a Nutshell 

In economics, inflation refers to the effect of a general increase in the price of goods and services. When prices rise, each dollar that you spend buys you fewer goods and services. That reduction in buying power over time is measured by inflation. A certain level of inflation is good for the economy since it signals growth. Too little inflation and consumers and investors have less incentive to spend, and the economy shrinks. Too much inflation and goods become too expensive for people to afford. Typically, the Bank of Canada tries to keep inflation between 2% - 3%. When it becomes too high, increasing interest rates is one tool the Bank uses to help bring inflation back under control. With today's ultra-low interest rates and rising inflation, what does it mean for mortgages? It's difficult to know with any degree of certainty; however, here are some considerations for a few common homeownership scenarios.

Buying Your First Home

First-time homebuyers are often pushing the limits of affordability as they transition from renting to buying. Budgets are often stretched, so first-timers are sensitive to price and interest rate increases. Inflation can lead to an increase in the carrying costs of a home, adding to the pressure. New homeowners may feel more comfortable with a fixed-rate mortgage offering some insulation against rising interest rates. The offered rate may be a little higher than other mortgage options, but you'll have the security of knowing it won't change until it's time to renew.

You Recently Got a Fixed-Rate Mortgage

Mortgage rates have been very low since April of 2020. So, if you entered into a fixed-rate mortgage, you are lucky! Not only are you paying very little for interest, but you can enjoy that rate for a little longer, even if interest rates increase.

You Recently Got a Variable Rate Mortgage

Variable-rate mortgages generally offer lower interest rates than fixed-rate. However, they carry the added risk of being directly dependent on the prime lending rate. The interest rate you pay will increase or decrease by the same amount that the prime rate rises or falls. If inflation were to rise steadily, it could mean several increases in mortgage rates over the term of your mortgage. Early on in your amortization, when you pay the most interest, that could mean a lot of extra money. As you get closer to paying down your mortgage, rising interest rates have less impact. 

Coming Up to Renewal

As your current mortgage term ends, it's an excellent opportunity to re-evaluate your situation and choose the type of mortgage that benefits you most over the next three to five years. Whether you choose a variable or fixed rate should have less to do with predicting mortgage rates and more to do with your risk tolerance and how close you are to fully repaying your principal. Compare scenarios with different interest rates to see which one works most in your favour. There are plenty of online tools to help you do the calculations or ask a mortgage broker for help. 

The only certainty right now is that interest rates will rise from their current historic lows - eventually. Our advice is the same whether it happens sooner, in response to rising inflation or later due to other economic factors. Don't panic. Instead of worrying, talk to a knowledgeable mortgage professional who can answer your questions about inflation and interest rates. A mortgage broker will advise you on the best course of action for your current financial situation and repayment goals, then shop around to find the best interest rate offer.