You may have heard rumblings of mortgage rate increases recently. As a mortgage broker, I can always tell when media have published their frequent “Lock in your Rate or Doom” headlines. We have received quite a few calls and emails over the past week or so from clients concerned that their mortgage rate / payment could be on the rise. It’s actually no wonder there’s so much concern. One flip to Financial Post this evening and I was ready to liquidate all of my personal belongings and head for my panic room. Luckily I know how media sells papers (there are still things called newspapers for sale right?) / clicks and it’s not by publishing “Nothing to Worry About Today” headlines.
I did feel however that there’s been enough concern raised by our variable rate clients that I wanted to get in touch and ease some concerns. Before doing something rash such as switching your current (likely awesome) variable rate mortgage into a more stable (boring /more expensive) fixed option, it’s important to remember why we opted for variable on your mortgage in the first place. It wasn’t just a short term solution to capture rates lower than fixed at the time. It was to set-up the mortgage that should improve your net worth position over the LONG TERM. There was much more strategy that just grabbing variable because it was half a point or more lower than fixed when we set up your mortgage.
Most of the rumblings that you are hearing right now about rates going up are due to increased bond rates which affect fixed mortgages not variable, which are attached to prime. In fact, we’ve already seen most fixed mortgage rates increase in the past week anywhere from .10-.25%. Prime rate hasn’t moved. That means your variable mortgage looks even better in comparison to fixed right now. I’ll say that again — the rate increases that we’re seeing right now are increases to FIXED mortgages. Since fixed rates don’t change over the life of the mortgage, the only folks directly exposed to these changes are those who are currently in need of a mortgage right away and who haven’t been told or convinced of the virtues of variable over fixed anyways (IE they need a better mortgage person in their lives).
Now I will say this — there has been some speculation that we could see the Bank of Canada increase the prime rate for the first time in over four years in the next few months. This is much earlier than most economists predicted at the start of the year but the rumblings certainly appear to becoming more pronounced. So realistically, I don’t want to rule out an increase to Prime & subsequently variable mortgages & Home Equity & personal Lines of Credit by the end of the year. This is much more likely to happen than we were led to believe 3-4 months ago. Remember though, even if Prime was to increase, your variable mortgage would still be substantially lower than the current rates of fixed and it’s extremely unlikely that an increase will be more than .25% at any one time.
Let’s consider these #’s:
An increase to the prime rate (if/when this happens) would probably change your payment $20-$35 a month (a .25% increase to prime will raise your payment approx $12 per $100,000 of mortgage). Locking into a new fixed-rate at the current market prices would increase $50 plus (you’d be taking a rate of 2.94 or higher by locking in in most cases. So it’s not as though a change in the prime rate is going to affect your budget considerably and certainly not more than flipping into fixed.
A few more points if what you have read so far isn’t enough and you still have thoughts of locking into fixed:
1) You have to choose a mortgage term equal to the time you have left or longer.
2) You would be locking into current fixed rates not the one that was available when you agreed to on your existing mortgage. That means you effectively pay a higher interest rate presently as a stable payment insurance policy where the added premiums go into your lender’s pockets. Why wouldn’t you just take that extra money that you’d be paying and pay down extra principle on your mortgage to rapidly decrease the overall mortgage balance. Then when/if rates do go up, your mortgage balance is reduced so the increase isn’t as noticeable. That’s effectively what you are doing with the variable mortgage. Heck we could even increase your payments to exactly what they’d be if you were to flip into a fixed and pay down even more principle in the mean time.
3) Fixed mortgages can carry far more substantial early payout penalties due to the dreaded Interest Rate Differential calculation that only comes into play with fixed mortgages. (See my additional link below for more info on this)
Long story short I struggle to see many situations that would see our variable clients benefit by flipping into a fixed mortgage in anticipation of dreaded mortgage doom that we’ve been hearing about for seemingly the past decade. I now have a saying that I borrowed from a colleague — “life is variable — your mortgage should be too”.
In conclusion: I’m not worried about a slight shuffle of variable rates whenever they do come and I’m on variable with my personal mortgage as well. We knew there could be adjustments to the rate when we set up the mortgage in the first place. It wasn’t meant to abandon ship at the very first rate change ripple. The ONLY clients I ever recommend being on a fixed mortgage are those with very narrow budgets where any payment change could cause distress or when they simply do not qualify under variable underwriting.
PS — Now’s probably a good time to highlight a blog that I published a while back in regards to why I side with Variable mortgages more often than not these days in the first place. http://bit.ly/VariablevsFixed
As always, please reach out if you have questions / concerns or want us to review your specific scenario to ensure it’s still a good fit. Click here to get in touch