I can’t believe how many of my clients have asked me this question over the past few weeks due to the recent increases in both the fixed and variable rates. With a fixed rate mortgage term, the mortgage rate and payment you make each month will stay the same for the term of your mortgage. With a variable rate mortgage, the mortgage rate will change with the prime lending rate as set by your lender and depending on which lender you are with, your payment amount may or may not change too.
Obviously, the variable rate term is the riskier of the two mortgage choices- so, with rate increasing, do you choose to stay variable or lock into a fixed rate term now before the rates increase even further?
Bank of Canada has raised the prime rate twice and it now stands at 3.20%. In the news we hear opinions that the Bank of Canada will pause any further increases until there is a better understanding of where the economy is going, though who really knows for sure?
There is a risk with the variable rate if the Bank of Canada continues to raise the Bank of Canada rate which in turn increases the Prime Rate. Some economist feel that it will rise by a full 1.00% in 2018. This is based on the Canadian Economy growing like it did in the first part of the year. Recent indicators suggest this growth is starting to slow. The next couple of months will show us more on how the Bank of Canada potentially will react.
The best way to decide if a variable rate mortgage product is right for you is to look at your budget and determine if you can afford any interest rate increases. Further to that, it is important that you understand the risks involved with variable rate mortgages and you need to be prepared to keep an eye on exactly what the rates are doing.
If you believe you can comfortably afford mortgage interest rates that are say, two per cent higher than what you are currently paying on your variable rate, then you should be okay sticking with a variable rate. The next thing you will want to determine is if a variable rate mortgage fits your personality. If you’re the type of person who can’t sleep at night knowing your interest rate may go up, even by just a little bit, a variable rate mortgage may not be the best option for you right now.
The usual suggestion I make to all of my variable rate clients to mitigate any risks is to fix your mortgage payment higher based on the current 5 year rate. Not only will you have a buffer if rates rise, but you will also take advantage of the current lower variable interest rate by having more of each regular payment going to paying down the principal.
While it may seem like a good idea to take advantage of a variable rate mortgage product while rates are still relatively low and switch to a fixed rate mortgage when rates begin to significantly increase, I don’t agree with this strategy as who is really going to have a whole lot of luck in timing the market? In my opinion, you take a variable rate mortgage product because you believe over time, the variable rate is going to average lower than your longer-term fixed.
Bottom line, is if you take a variable rate mortgage, stay with it. If you are thinking you will lock in to a fixed at some point, perhaps now might be the time.
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