Since the summer of 2017 we have seen the Bank of Canada Prime interest rate increase five times – from a low of 2.7% to the current 3.95%.
This means that most homeowners with variable rate mortgages have seen their mortgage payment increase five times in eighteen months!
At the same time, five-year fixed mortgage rates have risen from as low as 2.39% to current levels between 3.79% and 4.04%.
As you can imagine, our phones and inboxes have been kept busy with homeowners and buyers clamoring for our wisdom on what type of mortgage to select.
Before I get into your specifics, let’s just peek into our crystal ball.
Keep in mind predicting future interest rates is a dangerous pastime – many well-paid economists routinely get it wrong!
That said, the consensus out there is the Bank of Canada has two more rate increases in the works by year end 2019. Maybe three. And in fact, several economists are calling for interest rates to settle or even decrease starting in 2020.
The theory being the economy will need stimulating by then and what better way to do so than by lowering interest rates? Especially if the USA lowers their rates, as many feel will happen.
So, if this is all true, we might expect to see the Prime Rate peak at 4.4% to 4.65%. In other words, most of the increases have already happened.
If You Are In a Variable Rate Mortgage Today
Do you convert your mortgage to a fixed rate mortgage or do you stand pat and ride it out?
Chances are the moment you convert, your mortgage interest rate will instantly increase – perhaps by a full percentage point!!
Some people have a variable mortgage today where their rate is around 2.9%. And if they convert it might easily go up to somewhere between 3.8 and 4%.
In that case, the very thing you are trying to protect against you just made happen!
It also pays to look closely at the specifics of your variable rate mortgage. Is yours at Prime less 0.35% or is it more like Prime less 1%? If you don’t have much of a discount, you might also consider switching to another lender and getting a variable rate mortgage with a really deep discount from Prime. That’s a valid mortgage strategy in addition to considering switching to a fixed rate mortgage.
As an aside, there are a few lenders who offer variable rate mortgages where the monthly payments do not increase. Instead, the amount of money you owe at the end of your mortgage term is adjusted. At least with these mortgages, you can manage your cash flow easily.
If you are not sure what to do, give us a call and let us look over your situation and help you make an educated decision on what is best for you and your family.
If You Are Buying a Home Today
For many years, the smart money always chose a variable rate mortgage. Over any given five year term, these homeowners paid less interest than their conservative cousins who chose a fixed rate mortgage.
But that was in an environment where interest rates were consistently dropping or holding constant.
Now the trend is upwards. How long the trend will remain in place, we cannot say. Maybe things will plateau in a year or so, maybe not.
If you are offered a five-year fixed rate mortgage that floats your boat, maybe you should consider it. Let others pay attention to every single rate increase, while you watch your mortgage payment remain unchanged year over year.
Do keep in mind that the prepayment penalties on fixed-rate mortgages are typically higher than those of variable rate mortgages, so it’s important to choose your lender wisely if it’s possible you may need to break your mortgage mid-term.
On the other hand, if you want a lower interest rate to start with, ask your broker how low a variable rate mortgage might be for your case. And compare the best variable rate offering to the best fixed-rate offering.
If your best VRM is say 0.75% or more lower than the best fixed rate, then you have a lot of protection built in, and you might choose to stay flexible and variable.
No two people are the same and the answer could depend on a whole bunch of things, including how large is your mortgage and how well can you tolerate further increases. Ask me about your unique situation and I will help you make the right decision.