Mortgage Blog
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When to lock in your variable mortgage!
October 31, 2018 | Posted by: Andrew Wade
Should You Lock In Your Variable Rate Mortgage?
In November 2018, there’s been a lot of noise in the mortgage rate market – “RATES ARE GOING UP!” So in turn I have been asked by a lot of clients and colleagues, whether or not they should lock their variable rate mortgage into a fixed rate. Well, should you? It really depends on the following factors:
What’s Your Current Variable Rate?
I’ve always been very pro-variable rates at and often recommend them to clients when a) the spread is attractive when compared to fixed rates, b) the upward pressure on rates is either nonexistent or immaterial, and c) the financial profile warrants it. In today’s market, many of our client’s have variable rates ranging from 2.25%-3.9%. These are great rates. Chances are, if you lock in you’ll be opting for rates in the 3.5%+ range. This doesn’t make much sense to us as you’ll be forfeiting the lower rate benefits purely out of the fear instilled in you by the media. Generally speaking, we’d hold tight. However, if you’re going to repeatedly stress about it and lose sleep, then by all means go for it. An alternative would be to set your payments higher (perhaps equal to the prevailing “lock-in” rates) to hedge against rate increases. However, if you have a high variable rate, with little or no discount, it would be worthwhile to renegotiate your rate and potentially your term.
How Long Is Your Term?
If you’re nearing the end of your term, there’s more reason to re-evaluate your mortgage as you’ve already received the majority of the variable rate mortgage benefit. If you have a substantial amount of time remaining, it will depend on what your rate is. If you have a stellar rate, our thoughts are to stay put.
What Are Your Variable Rate Mortgage Plans?
If you intend to sell the property, refinance, or change the mortgage in a material way, you’re better off to keep your variable rate mortgage. The penalty to break a variable rate mortgage is only ever equal to 3 months interest (unless it’s restricted), which is both nominal and predictable. If you convert to a fixed rate, you lose control of your penalty. You’ll pay the greater of 3 months interest or the IRD (interest rate differential), which can be substantial and is based on market rates at the time of discharge. Typically between 3-5% of your total mortgage. Yes, you can port and blend most fixed mortgages, but there can be timing issues, fees and rates are often less attractive.
What’s Your Financial Profile? What does history tell us?
If you are sound financially and have a great variable rate, stick with it.
Mathematically, the variable rate has always outperformed the fixed rate. It’s not for everyone, but we’ve always preferred it. Are rates going to go up? By the sounds of it, yes. It’s impossible to predict by how much, but the fact remains that the economy is still very weak – obviously, there are other factors at play. Does that mean you should call us or run to the bank and lock in? No. Consider the factors above and make an educated decision.
What does history tell us?
Well Rates are still substantially cheaper than they have ever been in the history of the Canadian Banking world. In the last 10 years the variable rate has been as high as 5.5% for a 5 year term. They have been as cheap as 2.25% so we predict they will be coming up for a long time to come if we are ever to get back to bankers favourable position in relation to the economy. In 1973 Banks started offering posted fixed mortgages rates starting around 8% and going up to a record high of 20.25%. Today our posted rate is the same rate we qualify your mortgage at to debt service your income at 5.34%.
My best advice* Get a mortgage product that works for you and don’t let it keep you up at night. Don’t try to do too much at once. If you have a large mortgage put 10% of your earnings on your principal to max out your Pre Payment privileges and be Mortgage Free Sooner! Do this automatically through your bank and don’t allow access to these funds until the anniversary of your mortgage to automate the process. Be tough and get results your family can be happy with in your retirement.
If you ever have any questions for me on your mortgage please call me or email me anytime at my contact below.
