Mortgage consultant Glen Kelleway is paying close attention to an announcement by the Bank of Canada scheduled for July 10. On that day, the central bank will put out its target for the overnight rate, which has remained unchanged for more than a year.

According to Kelleway, who is based in Maple Ridge, a change in the rate is important for his clients, who either are looking to purchase a home in the Lower Mainland or have already bought a property. He told the Georgia Straight that it not only will affect how much money they'll have to set aside for mortgage payments but also could influence which mortgage option they choose.

He explained that the overnight rate is the interest rate that commercial banks charge each other when they borrow from each other. This guides financial institutions in setting their prime lending rate. "If you increase the overnight rate, you will increase the cost of borrowing for everyone across Canada," Kelleway said. "People won't spend as much money because it's more costly to borrow money."

On May 29, the Bank of Canada stated in a news release that "some increase in the target for the overnight rate may be required in the near term." The bank explained that this move is needed to rein in inflation in the midst of stronger-than-expected economic growth.

With the overnight rate going up, Kelleway said, variable mortgage rates will increase. As well, he noted, the word in financial circles is that the central bank is actually preparing for two rate increases: a quarter of a percent in July and another quarter of a percent later this year. He said that this will raise the variable rate from 5.1 percent to 5.6 percent.

Surrey-based mortgage consultant Gary Grewal told the Straight that it's always a better idea for clients to opt for a variable mortgage rate. "If the rates come down tomorrow, their rate will automatically come down as well."

Grewal said that another advantage is that people on a variable rate have the option to lock into a fixed rate at any time. "For example, tomorrow if the five-year fixed rate comes down to five percent, they can lock in at that rate," he noted. "Most of the clients these days are picking variable-rate mortgages because it gives them the flexibility of a better rate and the option to lock in in the future."

Kelleway said that for a person with a 25-year, $400,000 mortgage, a 5.1-percent variable rate means a monthly payment of $2,349.24 for principal and interest. If interest rates were to go up by a quarter of a percent in July, the same person would pay $2,406.75 monthly. He added that if rates were to increase by half a percent, that person would be looking at a monthly bill of $2,464.90.

There are no assurances that rates aren't going to increase some more, Kelleway emphasized. He explained that if the U.S. decides to raise its rates, Canada may have to follow suit.

One way to avoid uncertainty, Kelleway added, is to go for a fixed-rate mortgage, which is currently around 5.69 to 5.79 percent, depending on the amount borrowed.

Who is best suited to lock in a mortgage? Kelleway suggested first-time buyers with tight cash flows. "My first advice to people is if they are concerned about rates going up and there's a good possibility that they're going up a little bit more, then lock in," he said.

However, Kelleway noted that going fixed-rate isn't necessarily best for all types of buyers. "If the borrower is experienced and is aware and undaunted by the risk of a rate increase in the overnight lending rate, then taking the floating-rate mortgage may save them some amount of interest costs," he said. "Keep in mind that the floating rate has historically been a better choice for lower interest."

Real-estate agent Vilma Battad doesn't foresee a slowdown in the property market even if interest rates go up. She noted in an interview with the Straight that demand is being driven by the prospect of even higher prices because of the 2010 Olympics. "Many feel that they have no choice except to buy now," Battad said. "There is talk that prices will go down after 2010, but actually, nobody really knows."