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Climbing Rates?

In this era of “Economic Uncertainty” it just doesn’t make sense for any kind of huge interest rate hikes. I would consider this a bit of a blip on the radar. No massive need to be concerned in my opinion. Heck 2 years ago on my own personal mortgage I locked in a 5 year fixed rate mortgage at 2.89% because I said to myself this is “amazing”. Today’s rates are not even that far off of that. The question always comes up…  Where are rates headed and should I take a fixed rate or a variable rate?

The Bank of Canada understands the need to keep rates low. Again this month they have kept the overnight lending rate the same. The hopes are that people and companies will borrow lots of inexpensive money and grow their businesses and hire lots of people. Thus getting the economy growing.

Why did various banks raise their interest rates then? – Well I will describe to you the reasoning behind these recent increases. I am not so sure they will last that long either, but you never know. Time will tell.  These recent increases are a result of what might be a few things really. The first item is really the cost of funds banks use for mortgages. Investors who place large amounts of money with banks would like to see a bit of a premium on their return quoting things like “risk”. For example. “I need to make a bit higher yield on my money” just in case something happens. Recently there was a bit of a spike in this area but has since come back down. The other factor you will hear is that if my money has to be tied up for 5 years where I can’t touch it then I expect to be paid a bit of a premium on that money. We see a bit of that creeping into the market.  Lastly Mortgage Bonds have become slightly more expensive these days all due to the OSFI recent announcement that banks need to have more cash on hand per dollar that is lent out via mortgages. Less leverage means less profitability which means slightly higher rates to make up for that cost.

It’s a good thing over all yields remain low and I feel that this will offset the slight increase on cost of money to our big banks here in Canada. So enjoy these great times we are experiencing and don’t panic.

Fixed rates I still maintain are for people who want a bit of comfort knowing they are getting a great deal and don’t have to worry about rates for another 5 years.

Variable rates are for those who tend to be a bit more on the aggressive side and would like to squeeze out that last bit of savings they can. At least for the next few years this opportunity will still exist. But pay attention to the markets at that time for sure.

As always keep up the planning and research and you will be fine!

All the best!

Dan Heon

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    By: Dan Heon

    Dan Heon is the owner and broker of Mortgage Centre / Canadian Mortgage Team Alberta. He has many clients all across Canada that rely on his 18 years of real estate investing and his 13 years of mortgage broker work specializing in real estate investors. In 2010 Dan was ranked 16th in Canada out of over 20000 licensed mortgage professionals according to CMP magazine. Dan’s motto is, “Plan your finance… then finance your Plan!” According to Dan he gets paid by the Banks to help make people millionaires!

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