Should I Lock in My Variable Mortgage?

Interest Rates Have Risen…

The Bank of Canada Increased Rate by 0.25% Today…

The global economy has continued to strengthen, which promoted the Bank of Canada to raise it’s interest rate for the third time since last summer. This immediately affects Variable Rate mortgages.

Should I lock in my variable rate mortgage?

For me, this is a difficult question to answer.

The reason why this is a difficult question to answer is because, just like when purchasing a property, everyone’s own personal situation is unique. There is no one size fits all…

So Eitan, should I lock In?

Well, there are 3 main considerations:
1. Your current variable interest rate,
2. Your future goals and housing/mortgage plans, and
3. Your potential new fixed rate (this is a big one).

1. Your Current Variable Interest Rate
It is true that if you locked in with a fixed rate at sub 3% several months ago you would be very happy.

However, had you had a variable at around 2.1% to 2.4% over the past few months, and now you’re at 2.65% (on the high side), you’re still sitting pretty…

If your variable rate has increased to 3% and over, you may want to think about locking in.

2. Your Future Goals and Housing/Mortgage Plans
There are two very good reasons why the variable is and has been a great choice… The first is that variable rates are generally lower than fixed rates. Due to interest being front-loaded on a mortgage (you pay the most amount of interest at the beginning of your term), variable rates in an increasing rate environment, even if the increased variable rate becomes higher than the fixed rate, can have a total lower interest cost over a 5-year period.

So, if you’re managing your mortgage and using our prepayment strategies, you’ll likely still be ahead, even with further increases in the variable rate.

The second reason why variable rates may be preferable over the fixed is that the variable rate has the lowest prepayment penalties. Variable rate prepayment penalties are below 1% of the mortgage, where fixed rates at big banks can be 4%+ of the outstanding mortgage.

One important note here is that although we do expect at least 1 more increase in the variable rate this year, interest rate hikes have happened before. In 2010, the Bank of Canada increased rates three times for a total of 0.75%. Rates then stalled for a few years and decreased again by 0.5% in 2015. For clients who locked in… they looked back and were not happy about having done so.

3. Your potential new fixed rate.
When it comes to new mortgages, the interest rate you are able to get is predicated on whether you have an insured, insurable or uninsurable mortgage.

The article link above basically states that in the past, it was easier to quote a rate. However, new government regulations make it so that there is a fragmentation of interest rates, with different rate tiers for each specific situation.

The best rates are for insured mortgages and for a straight transfer from one lender to another. The transfers have to have low loan to values and the mortgages have to be approved as though the mortgage is insured.

Slightly higher rates are for “uninsureable” mortgages. An uninsurable mortgage is anything with 30 years amortization, or if the home is over $1M.

If your mortgage is insurable, and we can get you a rate of around 3.29% or lower, and your current variable is over 2.90%, you may want have a conversation about locking in to a new fixed rate with us. They key here is whether or not your new fixed rate is less than 0.5% difference in your variable rate.

Current insurable fixed rates are around 3.19%. Uninsurable rates are around 3.59%.

My Suggestion: Barring any considerations from item 2, I think if you were going to jump any more than 0.5%, it would probably not be in your interest to lock in…

BONUS,  Anxiety… If you feel uncomfortable with any increase in your mortgage payment due to increased rates, you’re not alone. Give me a call and we’ll see what we can do.

I hope this little write up made sense. Please don’t hesitate to contact me if you have any questions.
Eitan – 778-990-8950

BONUS x 2 – Home Equity Lines of Credit (HELOC) – Since HELOCs are also increasing in rate, it also may be prudent to give us a call to see if locking in your HELOC into a variable or fixed rate is right for you…