Don’t Be in a Hurry to Ditch Your Variable Rate Just Yet.
The Bank of Canada’s interest rate increase of 0.5% — the largest single rate increase in decades – may have sent variable rate mortgage holders into a panic. We’ve already had many clients contact us, asking what rates are likely to do in the future, and if now is the time to switch. But really we can summarize the current situation with this simple question: should I switch to a fixed rate mortgage?
In June, we are expecting additional increases which could lead to a prime lending rate of 3.7%, which may send many of you into a panic. While there is certainly a lot to be said for predictability and peace of mind, now may not be the time to switch.
Banks are well positioned to profit in this kind of environment (that is why we work for you and not for them!). They will try and entice you with a free offer to switch from a variable rate to a fixed rate. Typically they will present a 5 year fixed rate “deal” of 3.99% that expires in a few days; otherwise your rate will increase to 4.14%. They may try to convince you that rates will continue climbing to high levels, and that riding out a variable rate as we enter into a possible recession could be catastrophic.
The sad truth is that the time to lock in a fixed-rate was likely when we were at historic lows for 5 year fixed rates in the 2.59-2.99% range.
At the same time, many variable rate holders secured below-prime discounts (typically in the 1- 1.25% range), but these discounts are for the most part gone for refinances and conventional mortgages. We anticipate that lenders will ease up on discounts, leaving us with variable rates in and around the prime minus 0.5-0.75% range.
So, what should our variable-rate mortgage clients do, and how can they be prepared for the expected climb in rates over the next 12 to 18 months?
Our team has a combined experience of two decades in working with our clients and coaching them on the benefits of variable rates mortages. Yes, there is some risk (and at times) a bit of panic involved, but we leverage floating-rate products from a variety of lenders to save our clients tens of thousands of dollars in interest costs and to cut years from their mortgage amortization.
Variable mortages aren’t for everyone, and if you aren’t sure what to do in the face of rising rates, remember: don’t panic or jump at a seemingly attractive offer from the bank. Instead, take the time to meet with us and review all of your options.