What Are Inflation’s Effects on Mortgage Rates?
Inflation and mortgage rates might seem like big, intimidating words that only bankers use, but honestly, they’re just terms that explain how the economy around us is moving. If you’re a homeowner, a hopeful first-time buyer, or someone keen on investing in property, understanding what these words mean and how they affect you can be a real game-changer.
So what are these terms? Well, inflation is just a fancy term for prices going up over time. And mortgage rates? That’s just how much it costs you to borrow money for your home. Now, with talk of inflation continuing in the headlines for the rest of 2023, you might be scratching your head and wondering: How does inflation affect mortgage rates in Canada?
Here at The Mortgage Station, we’re ready to be your tour guide, unravelling the intricate relationships between inflation, interest rates, and mortgage rates, and how they interplay in the grand scheme of Canada’s economy.
Table of Contents
- What is Inflation?
- Mortgage Rates 101
- How Does Inflation Affect Mortgage Rates?
- Will Mortgage Rates Decrease in Canada in 2023?
- Is It Wise to Pay Off a Mortgage During High Inflation?
- The Impact of Rising Interest Rates on Mortgage Payments
- Understanding the Relationship: Mortgage Rates vs. Inflation Chart
What is Inflation?
In the simplest terms, inflation is when the general price of goods and services in an economy increases over time. When inflation happens, your “purchasing power” — or how much you can buy with a set amount of money — decreases. You might have noticed the price of your favourite chocolate bar creeping up over the years; that’s inflation in action.
It’s essential to remember that some level of inflation is not only normal but also necessary for a healthy economy. It stimulates spending (since money today is worth more than money tomorrow), and it can reduce the burden of debt over time — because the value of the money you pay back is less than when you borrowed it.
Mortgage Rates 101
So, now that we understand inflation, let’s look at mortgage rates. Simply put, a mortgage rate is the interest charged on the amount you borrowed to buy your home. In Canada, you’ll commonly come across two types: fixed-rate mortgages and adjustable or variable-rate mortgages.
A fixed-rate mortgage has an interest rate that stays the same for the term of the mortgage, be it 2, 5, or even 10 years. This type of mortgage can be beneficial when you want predictable monthly payments. You know what’s coming, and you can budget accordingly.
On the other hand, an adjustable-rate mortgage has an interest rate that can change over time. Usually, it’s linked to the Bank of Canada’s policy interest rate, plus a fixed percentage. While this type of mortgage may start with a lower interest rate than a fixed-rate mortgage, it’s subject to increase if the policy rate goes up.
How Does Inflation Affect Mortgage Rates?
When it comes to the relationship between inflation and mortgage rates, think of it as a dance. When inflation takes a step forward, mortgage rates tend to follow.
Here’s why: lenders lend money to earn interest. However, when inflation is high, the money they get paid back is worth less than when it was borrowed due to the reduced purchasing power. To compensate for this loss, lenders often increase the interest rate they charge for loans, including mortgages.
This is why inflation and mortgage rates usually rise and fall in tandem.
Will Mortgage Rates Decrease in Canada in 2023?
Peering into the financial crystal ball for the remainder of 2023, you might be wondering, will mortgage rates decrease in Canada?
The thing with the financial world is that it’s influenced by many moving parts. Inflation is one of those parts, but so are things like government policies, global economic trends, and actions taken by the Bank of Canada.
Given the Bank of Canada is expecting inflation to slow in the latter half of 2023, there’s a chance that mortgage rates could stabilize or begin to trend downward. However, it’s crucial to stay informed and keep up-to-date with expert analyses from trusted sources.
Is It Wise to Pay Off a Mortgage During High Inflation?
This question is one that many homeowners and investors grapple with during periods of high inflation. On the surface, it might seem like a straightforward decision. After all, wouldn’t it be great to be debt-free? However, when you dive deeper into the economics of it, the answer isn’t quite as simple.
Here’s the deal: inflation decreases the purchasing power of money over time. This means that the value of the dollar you borrowed when you first got your mortgage is higher than the value of that same dollar in a high inflation period.
So, if you took out a mortgage when inflation was low, the real or inflation-adjusted cost of that mortgage decreases as inflation rises. In other words, you’ll eventually repay the mortgage with “cheaper” dollars than the ones you initially borrowed.
This is why, in periods of high inflation, it might actually be beneficial to keep your mortgage rather than rush to pay it off. The money you would have used to pay off your mortgage can often be better utilized elsewhere, such as in investments that offer a return rate higher than your mortgage interest rate.
Of course, the right choice heavily depends on your personal circumstances, including your mortgage terms, financial goals, risk tolerance, and overall financial health. Therefore, it’s wise to consult with a trusted financial advisor and mortgage professionals, like our team at The Mortgage Station.
The Impact of Rising Interest Rates on Mortgage Payments
If you’ve opted for a variable-rate mortgage, rising interest rates could increase your mortgage payments. As the Bank of Canada’s policy interest rate goes up, so does your mortgage rate, which means higher monthly payments.
Conversely, if you have a fixed-rate mortgage, a rise in interest rates won’t affect you — at least not until it’s time to renew your mortgage. If rates have risen significantly by the time you renew, you could be looking at higher mortgage payments for your next term.
If this is starting to sound complicated, don’t worry! You can always use The Mortgage Station’s Mortgage Calculator to figure out what your payments might look like.
Remember, no matter which type of mortgage you have, you can always consider refinancing to secure a better rate. Wondering how to do that? Our knowledgeable team can help you figure out how to refinance your existing mortgage.
Understanding the Relationship: Mortgage Rates vs. Inflation Chart
As we mentioned, there’s usually a close relationship between inflation rates and mortgage rates. However, several other factors can influence mortgage rates, so the correlation isn’t always perfect. A chart showing mortgage rates and inflation over time can give you a real sense of how these two move together.
But remember, these charts are just a snapshot of the broader picture. Your individual circumstances could be quite different, influenced by your financial situation and the type of mortgage you have. To truly understand how these economic trends may affect you, it’s best to consult with your financial advisor and trusted mortgage professionals.
Make the best mortgage decision for your financial situation with help from The Mortgage Station!
Navigating through the waves of inflation, interest rates, and mortgage rates can be challenging. Still, it’s important to understand inflation’s effects on mortgage rates, as it can significantly impact your finances — especially if you’re a homeowner or looking to become one.
Here at The Mortgage Station, we’re all about making home financing easy to understand. So, if you’ve got questions about inflation, mortgage rates, or anything else, don’t hesitate to get in touch with us. We’re ready and excited to help you navigate the world of home financing, every step of the way. Whether you’re looking to purchase a property, consolidate debt, refinance your existing mortgage, or explore investment opportunities, we’re here to help.
Q: How does inflation affect mortgage rates in Canada?
A: When inflation increases, mortgage rates usually follow. This is because lenders need to compensate for the decrease in the purchasing power of the money they get paid back.
Q: Will mortgage rates decrease in the latter half of 2023 in Canada?
A: It’s challenging to predict exact mortgage rate movements as they’re influenced by many factors, including inflation, government policies, and global economic trends. While the Bank of Canada is currently predicting a drop in inflation, it’s best to stay informed with regular market updates.
Q: Is it a good idea to pay off my mortgage during high inflation?
A: While it may seem like a good idea to pay off your mortgage during high inflation, the reality is more nuanced. High inflation reduces the real cost of your mortgage over time, so it might be beneficial to keep it. However, personal circumstances can vary, so it’s wise to consult with a trusted financial advisor and mortgage professional.
Q: How will rising interest rates affect my mortgage payments?
A: If you have a variable-rate mortgage, rising interest rates could lead to higher mortgage payments. If you have a fixed-rate mortgage, rising interest rates won’t affect you until it’s time to renew.
Have more questions? Speak to a Mortgage Station mortgage broker now!