Some mortgage borrowers’ confidence in variable rates could be tested as the Bank of Canada’s target for the overnight rate begins its inevitable rise, possibly as early as this week.
Recently, a client contacted me, writing: “Are you able to provide me with any further advice on when we should move to a fixed rate? All the news seems to imply that such a choice is becoming imminent. “
It’s a perfectly legitimate question, and one that many mortgage borrowers have asked themselves.
Every day, mortgage borrowers wonder whether they should opt for fixed or variable, given the upcoming rate increases. And almost as often, once bold and brave, variable rate mortgage customers ask if they should move to a fixed rate…and if not now, then when?
Here’s the thing… when you chose a variable rate mortgage, you knew the rate would vary. This means that the rate may go up or down from time to time, but you cannot expect it to stay constant for the duration of your mortgage.
So after years of falling and fixed rates, borrowers are now about to taste a rate hike for the first time, and some are throwing their initial rate-selection logic out the window.
That may sound harsh, and in fact that’s not really how I feel because I’m a big believer in emotional health and well-being. I think this should be an important factor in any borrower’s decision. That, and its ability to withstand payment increases.
Why choose a fixed rate mortgage?
If you just don’t have the stomach for rate increases and fluctuating monthly payments, you can get instant peace of mind by fixing your mortgage rate. There’s no shame, and no one can tell you it’s the wrong decision.
For the risk averse homeowner, mortgage expert Rob McLister wrote in a recent Globe and Mail column that, “a 5-year fixed makes sense for most long-term borrowers with less established finances. It also protects against the small but real risk that inflation will be significantly underestimated.
McLister also argued that a fixed rate can benefit traditional real estate investors with a holding period of more than five years.
Where are interest rates really going?
Nobody really knows where the rates are going. Never. Not even the highest paid government, bank and economists.
Mortgage Alliance broker Renee Matiushyk-Stribbell told me, “I’ve been doing this forever and comparing these projections to be as accurate as the weather forecaster. No one can predict the future of rates because we have no idea what is going to happen in the local or global economy.
She added: “Nine out of 10 times in the past when predictions like this have come out, they have been wrong. So when people ask me about rate forecasts, I tell them I have no idea and, really, no one does.”
The Bank of Canada significantly reduced its target for the overnight rate at the start of the pandemic, from 1.75% to 0.25% in March 2020. As a result, the prime rate, on which rates are based variables, fell from 3.95% to 2.45%, where it has been since. And suddenly, a whole host of homeowners experienced the thrill of sub-2% variable rate mortgages for the very first time.
Since then, the party has been loud and rowdy, with more people choosing adjustable rate mortgages than at any time in memory. And variable rate mortgages are now commonly available at less than 1.50%, some even at the unimaginable 1%. Current fixed rate offerings of 2.79% or more pale in comparison.
Should you stick with an adjustable rate mortgage?
Several reputable brokers make very strong and convincing arguments as to why borrowers should hold their ground, that with the spread between variable and fixed rates being so large, you can withstand many increases in the prime rate before your situation deteriorates. ‘worsen.
Of course, there is no law stating that rate increases will be limited to 25 basis points at a time. They could be bigger.
And let’s not forget that if you ever have to terminate your mortgage, you will benefit from the prepayment penalty on a variable loan (usually three months interest) much more than on most fixed rate mortgages.
Mortgage broker Dave Larock of Integrated Mortgage Planners is always an excellent source of information on mortgage interest rates – I trust his opinion over most economists. Here is his advice to those considering variable rate options:
- Commit to your strategy. Mid-term conversion will almost always result in a higher fixed rate than is available today.
- Set your payments as if you had taken a fixed rate. This will absorb the impact of several short-term rate hikes.
The take-out sale
It’s a personal decision for you to make, not your banker, mortgage broker, realtor or buddies. Do what makes sense for you and your finances. Be respectful of your partner’s opinions and find an approach you can both live with.
If you need help assessing your situation, as Larock says, “there are many mortgage brokers and agents out there, but only some of us stay on top of market conditions and can offer an informed opinion. on the current variable rate risk”.