The Central Bank of Canada is on the rise interest rate have some variable interest rate mortgage holders think about the downside of locking in a fixed rateaccording to experts who spoke to Global News.
But the peace of mind that comes with steady rates has trade-offs that homeowners should be aware of before choosing to convert, they warn.
Victor Tran, mortgage and real estate expert at rate.ca, says he’s seen a “upper” in clients asking about fixed-rate locking Mortgage since Bank of Canada increased its policy rate to 3.25% on September 7, 75 basis points increase.
“I think this most recent rally has certainly made many Canadians more concerned about their finances,” he said.
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Variable-rate mortgages with adjustable payments drive up monthly mortgage costs with central bank rate hikes, while homeowners with fixed-rate mortgages Investors only feel the pain of higher interest rates when they renew at the end of the term.
With the Bank of Canada’s policy rate up 300 basis points since the beginning of 2022, adjustable-rate mortgagers have faced skyrocketing monthly payments.
Leah Zlatkin, mortgage broker and expert at lowrates.ca, said in the past week she’s also heard from more clients who are worried that mortgages are profitable. Their swinging interest rates could soon become unmanageable as the Bank of Canada has signaled further rate hikes.
“We’ve seen several rate hikes in a row and now it’s not stopping for a bit,” she told Global News. “So many clients are wondering where is the point where I pull the trigger and I go from variable to fixed?”
Increased borrowing costs for homeowners and potential buyers
What is the ‘difference’ between variable and fixed?
Variable-rate mortgages explode in popularity over time Pandemic caused by covid-19 when central bank interest rates bottomed making borrowing cheaper and more accessible to housing.
But as interest rates rise through 2022, Tran says the “gap” between variable and fixed rates has narrowed significantly.
He gave the example of a client who came to him recently to inquire about a conversion: he had a rate of change equal to the prime rate (5.45% at most lenders). minus 1.35%, or 4.1% now. Tran himself also notes that it is an “amazing ratio”.
At the same time, he said his customers have a chance of getting a fixed interest rate for 5 years of 4.69%. Then the “spread” for him is now 0.59 percentage points.
Some major banking economists in Canada are expecting the central bank’s rate hike cycle to bring the benchmark interest rate to 4% by the end of the year, adding 75 basis points.
Tran said his client is now deciding whether to “hedge his risk” by pegging the rate slightly higher today in the expectation that the bank will raise interest rates above the current spread. at or not.
“It is very difficult to time the market. No one knows what the future rate will be. We don’t know if we’re at a peak for a fixed or variable rate,” Tran noted.
“They will increase by 50 points, maybe 75 points? We do not know. But that’s what he’s asking himself, is it worth locking himself in now just for long-term protection? “
Zlatkin notes that calculating the spread is a little different for each client. While today’s five-year fixed rate is typically offered around 4.7% with a loan-to-value ratio of 80% on the mortgage, she says she also sees interest rates as high as 5.39 %.
She said that the variable rate is currently floating between the base rate minus 0.6% and the prime rate minus 1.2%.
While every client’s financial situation is different, Zlatkin says that for a homeowner with a variable mortgage paying a rate of 4.6% or more, “it may be time to start thinking about it.” a fixed amount”.
Does the transition fit into your life plan?
The variability and predictability of monthly payments aren’t the only factors to think about when converting variable interest rates into a fixed mortgage.
Tran says homeowners should consider whether over the next one to five years they anticipate major life developments that could lead to a mortgage change; Having a baby and getting a bigger home, moving into town, or refinancing a major renovation are all common examples.
If you feel that you may need to break out a mortgage for any reason, a variable rate mortgage offers homeowners much more flexibility than a fixed rate mortgage because usually harsher penalties associated with breaking the latter.
Variable-rate mortgages all come with a three-month interest penalty, while their fixed-rate loans may have a higher fee attached to the difference between the contract and fixed-rate interest rates. interest rates today.
While it’s common to worry about the pain of higher interest rates in an up cycle, Zlatkin says it’s important to remember that interest rates rise and fall in cycles and lower rates come back.
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Lockdowns may provide reassurance today, but could bring fear of missing out as inflation comes back under control and the Bank of Canada finally lowers interest rates.
“Once you’ve locked in that five-year fixed rate, it’s very hard to get out of it,” says Zlatkin. “Buyers always regret it when you see someone else getting a lower price.”
Find predictability without keys
While five-year fixed-rate mortgages are the most popular choice for Canadians, there are other ways to ease pressure on interest rates, experts say. know.
You can consider different financing options, Zlatkin says, such as varying the mortgage’s amortization period and paying a fixed monthly amount at a variable rate.
For those who choose to keep a fixed rate, a one, two or even three year term can allow you to “weather the storm” and find a mortgage that better suits your financial situation. when the current rate hike cycle is complete, she added.
Tran says that for variable rate owners thinking of locking in a slightly higher fixed rate today, one option might be to make quick payments on your mortgage as if you had pay a higher rate than that.
In other words, pay your variable rate the same as you converted to fixed.
Tran notes that advanced mortgage payments always go directly to principal, not interest. And in this case, if the rate goes up to the point where you’ll pay as much for your variable rate as if you’d converted to a fixed rate, you’ve budgeted for a higher amount while keeping flexibility. performance of variable mortgages.
“Then if that prime rate goes up again, it won’t have any effect on you basically because you would have paid a higher amount in the first place. So it’s just a way to mitigate a bit of risk,” he said.
Whether owners of variable-rate mortgages switch to fixed-rate or they alter their finances to provide more predictability the other way around, Tran said he expects the traditional popularity of Fixed-rate mortgages will continue to exist, both for homeowners preparing to renew and for buyers entering the market today.
“I think a lot of Canadians are just looking for certainty right now.”
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