Refinancing Your Home? Inflation Fears May Push Mortgage Rates Higher

Canadians weighing their home refinancing options should be keeping an eye on what the experts are saying about how rising gas prices are pushing Canada's inflation numbers higher. One of the fundamental questions homeowners always face when it comes time to refinance their mortgage is whether to lock in their mortgage rate with a fixed-rate mortgage, or to play the market with a variable rate mortgage.

When mortgage rates are relatively low, as they are now, a variable-rate mortgage will generally carry a lower interest rate. Central banks raise interest rates in order to ward off inflation, forcing banks and lenders to raise the interest rates for loans and mortgages. Going with a variable rate means that you are wagering that interest rates will stay the same or drop - or, at least, they will not go up so significantly that the gains you make by selecting a lower variable-rate mortgage will not be eroded over the term of the mortgage as rates rise. Right now, inflation is a concern for Canadian bankers, the question is how great a concern that is.

Inflation pressures have reasserted themselves, domestically as well as internationally, forcing policy makers to readjust their interest rate sights," notes Scotiabank's Global Economic Research Group.

Canada's central bankers have already raised the red flag, signaled their concern about rising inflation. The Bank of Canada meets again July 15th to set their trend sending overnight lending rate. For Canadians facing the perennial mortgage refinancing question - fixed-rate versus variable rate - making the right decision means guessing how the Bank of Canada views the risks of inflation and whether they will force rates higher. Scotiabank's analysts think not.

"For the most part," Scotiabank's analysts write, "there are few indications that inflation expectations have become rampant." They suggest that "weakening economic growth should eventually curb the run-up in inflation." their prediction is that Federal Reserve in the U.S. and the Bank of Canada "are likely to remain cautious for the foreseeable future, and keep their overnight interest rates steady."

With Canadians still facing sticker price shock at the gas pumps, one wonders how long rates will stay down and, in fact, if rates will begin to drop again in the new year as Scotiabank predicts. Perhaps the best advice for Canadians who are facing a home refinancing decision this summer is to consult a mortgage broker who can give independent advice free from the position taken by the banks' analysts.