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YIKES!!!! Do I stay in a variable rate mortgage or convert into a fixed rate term before the rates go up even higher????

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Definition of a decision- A choice made between alternative courses of action in a situation of uncertainty.

Even with 35 years of mortgage experience, I am confused as to how to answer this question because the economists seem to all have different opinions about what is going to happen with the rates and let’s face it, no one has a crystal ball.

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. Does risk really come with reward? With rates significantly 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 recently raised the prime rate twice and it now stands at 3.20%. In the news we did hear opinions that the Bank of Canada was going to pause any further increases until there is a better understanding of where the economy is going, however, most recently there are now grumblings that there will be increases in prime now coming in the short term.

Some economist feel that the prime rate will rise by .75% in 2018. This is based on the Canadian Economy growing like it did in the first part of the 2017 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, 1-2 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 to forgo the lower variable rate option and take a fixed rate term.

Take a look at the graph below provided by one of my favorite lenders, CMLS, which details what has happened in the past with variable rates versus fixed rates. The $64,000 question I have is -does history repeat itself?

CMLS Financial -Historical Fixed Vs Adjustable Rates Chart

If you want some calculations done then contact the #MortgageGirlca and run the numbers. Former bank turned #MortgageBroker with over 35 years of experience. #benefitfromexperience Contact her via phone –780-433-8412 or email – info@mortgagegirl.ca . Follow her on Facebook, Twitter, or read more of her blogs at – mortgagegirls.wordpress.com

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