Variable: Lock in? And if Yes, When?

The variable rate does seem like it’s a good option now… especially since the discount off prime is now so great. However, the variable rate is still higher than the fixed rate… so when do we lock in to a fixed rate, and does it even make sense to lock in?

First off, there are two potential options for people who take a variable rate and who want lower rates in the future… The first option is to wait for the variable rate to decrease and benefit from that decrease, while keeping your mortgage a variable rate. The second option is to wait until the fixed rates decrease, and then lock your variable rate into a fixed rate.

In option 2, we could take a variable rate today at 6.3%, say, insead of a fixed rate of 5.09%. If in 4-5 months the fixed rates have decreased, the variable rate could then be locked in and converted to a fixed rate. This “conversion” comes with no penalty. 

So what do we do? Stay variable or lock in?

I think it all depends on each borrowers’ personal preferences. The reason I say this is because A) we don’t know the future and what rates will do, and B) we have to ask each person’s risk tolerance, and if they are OK with the variable for the long haul, and C) payment that comes with the variable will be “invariably” (ha, see what I did there?) higher. This means that someone who is on the variable may want to switch to a fixed sooner rather than later to take advantage of lower payments.

Long story short, the variable is a good option for those who think rates will decrease in the future; specifically, it is good for people who think either the variable rate will decrease OR the fixed rate will decrease. Again, the only issue now is that the variable rate is currently higher than the fixed rates, and make it less appetizing than a lower-payment, fixed-rate mortgage. Well, that’s not the only issue: the fact that rates can stay high for longer is another issue altogether… And no, my crystal ball left me when I got married.

Here to help with any questions 🙂