Should I renew my mortgage before or after the next Bank of Canada meeting?

Deciding to renew your mortgage before or after a Bank of Canada (BoC) meeting hinges on your risk tolerance, the current economic outlook, and your mortgage type. Renewing before a meeting can provide certainty by locking in a rate, especially if rate hikes are anticipated, while waiting might yield a better rate if cuts are expected or if the market has already priced in changes.

Generally, variable mortgage rates are more directly affected by BoC announcements, whereas fixed rates are influenced by bond markets that often move in anticipation of future BoC actions.

How do Bank of Canada decisions impact mortgage rates?

Bank of Canada decisions directly impact variable mortgage rates and indirectly influence fixed mortgage rates. When the BoC adjusts its target for the overnight rate, prime lending rates at financial institutions typically follow suit, directly changing the interest rate on variable mortgages.

For fixed mortgage rates, the primary driver is the Government of Canada bond yield of comparable terms (e.g., 5-year bond yields for a 5-year fixed mortgage). These bond yields react to market expectations of future economic conditions and inflation, which are often shaped by the BoC's forward guidance and past actions, sometimes moving well before an actual BoC announcement.

Therefore, while a variable rate will usually change on the day of or shortly after a BoC announcement, fixed rates often anticipate these changes weeks or months in advance, or react to the underlying economic data that informs the BoC's decisions.

When might renewing before a BoC meeting be a good strategy?

Renewing before a Bank of Canada meeting is a good strategy if market sentiment and economic indicators strongly suggest an impending rate hike or if you value rate stability and predictability above all else. Locking in a rate prior to an expected increase protects you from potentially higher payments.

This approach is particularly advisable if your current mortgage is variable and you anticipate further BoC rate increases, or if you prefer the certainty of a fixed payment and believe rates are near their lowest point or are set to rise. Many lenders offer a rate hold for 90 to 120 days, allowing you to secure a rate in advance and providing a buffer against immediate market fluctuations.

Consider this if you have a short time horizon before renewal and want to avoid the anxiety of waiting for a decision that could go against your favour.

When is it better to wait until after a BoC announcement?

It is often better to wait until after a Bank of Canada announcement if market expectations or economic indicators point towards a potential rate cut or a hold with dovish (rate-cutting) guidance. If the BoC decides to lower its overnight rate, variable mortgage rates will typically decrease, resulting in lower payments.

Even for fixed rates, if the BoC signals future rate cuts or if inflation is seen to be under control, bond yields may drop, leading to lower fixed-rate offerings from lenders. Waiting allows you to capitalize on these potential reductions. However, this strategy carries the risk that rates could also unexpectedly increase or remain unchanged, potentially leaving you with a less favourable rate than what was available pre-announcement. It requires a higher tolerance for risk and a good understanding of market forecasts.

For example, if you have a variable rate mortgage and the BoC is widely expected to cut rates, waiting allows you to benefit directly from that reduction. If you have a fixed rate and bond yields have already moved significantly in anticipation of a cut, waiting to see the actual announcement might confirm the trend or present a better rate post-announcement if the market overreacted initially.

How do fixed and variable rates react differently to BoC news?

Fixed and variable rates react differently to Bank of Canada news because they are tied to different underlying market instruments. Variable rates are directly linked to the lender's Prime Rate, which typically moves in lockstep with the BoC's target for the overnight rate.

For instance, if the BoC increases its target by 0.25%, the Prime Rate usually increases by 0.25% within hours, causing immediate changes to payments on variable-rate mortgages. Fixed mortgage rates, on the other hand, are priced off Government of Canada bond yields (e.g., 5-year bond yields for a 5-year fixed mortgage). These bond yields are influenced by investors' long-term expectations for inflation and economic growth, which are informed by, but do not directly mirror, the BoC's short-term rate decisions.

Bond yields often move in anticipation of BoC actions or react to broader economic data before any official announcement. So, while variable rates are a direct response, fixed rates are a market-driven interpretation of the BoC's current and future monetary policy.

To illustrate, consider a $400,000 mortgage balance with a 25-year amortization. If you're on a variable rate of Prime - 0.50% (e.g., 6.70%), and the BoC raises its rate by 0.25%, your rate would increase to Prime + 0.25% - 0.50% (e.g., 6.95%). This would raise your monthly payment from approximately $2,698 to $2,763, an increase of about $65 per month. For a fixed rate, a 0.25% change would also cause a similar payment increase, but this change would be driven by bond market movements rather than a direct BoC decision.

What is a mortgage rate hold, and how can it help with timing?

A mortgage rate hold is a commitment from a lender to guarantee a specific interest rate for a set period, typically 90 to 120 days. This feature is invaluable when timing your mortgage renewal around Bank of Canada meetings, as it provides a protective shield against adverse rate movements.

By securing a rate hold, you lock in an interest rate for up to four months before your renewal date. If rates increase during this period, your secured rate remains protected. If rates decrease, most lenders will allow you to take advantage of the lower rate. This 'best of both worlds' scenario reduces the risk associated with anticipating BoC decisions.

The 120-day rate hold is a crucial tool for managing uncertainty, allowing you to plan your renewal strategy with more confidence, knowing you have a ceiling on your potential interest rate, while still being able to benefit if rates drop.

Should I consider switching lenders at renewal?

Yes, you should always consider switching lenders at renewal to ensure you're getting the most competitive rate and terms available in the Canadian market. Your existing lender's renewal offer may not be the best available, and exploring other options can lead to significant savings.

Since November 2024, uninsured mortgage switches between federally regulated lenders are exempt from the OSFI B-20 stress test. This exemption makes it easier and more appealing to transfer your mortgage to a new financial institution without having to re-qualify at the higher stress test rate, provided your loan amount does not increase.

This change drastically reduces a major barrier to switching, empowering consumers to shop around more freely. It is important to compare not only rates but also terms, prepayment privileges, and any potential fees associated with transferring your mortgage.

For example, a 0.10% lower rate on a $500,000 mortgage amortized over 25 years could save you approximately $27 per month, or $1,620 over a 5-year term. While seemingly small, these savings add up. A mortgage broker can help you compare offers from various lenders efficiently.

Comparing Fixed vs. Variable Rate Decisions Around BoC Meetings

Choosing between a fixed or variable rate around a Bank of Canada meeting involves assessing your personal risk tolerance and market outlook.

Fixed rates offer payment stability, insulating you from immediate BoC rate changes, while variable rates directly reflect these changes, offering potential savings during rate cut cycles but higher costs during rate hike cycles. The decision often boils down to whether you prioritize certainty or the potential for lower rates, albeit with fluctuating payments.

How can I get personalized advice for my mortgage renewal?

The best way to get personalized advice for your mortgage renewal, especially regarding Bank of Canada meetings, is to consult with a licensed Canadian mortgage agent. An agent can analyze your specific financial situation, risk tolerance, and current market conditions to provide tailored recommendations.

They have access to a wide array of lenders and products, allowing them to compare rates and terms effectively, often securing better deals than going directly to your bank. Furthermore, they can help you understand the nuances of rate holds, potential penalties, and the implications of BoC announcements on both fixed and variable mortgage products.

Considering the significant financial impact of mortgage interest rates, taking advantage of a free mortgage renewal review can provide clarity and potentially save you thousands of dollars over the term of your mortgage. Try our mortgage renewal calculator to estimate your potential savings.