While home owners have enjoyed low interest rates over the last number of years, the days of cheap borrowing are coming to an end. Interest rates are on the rise. In fact, the Bank of Canada has raised its rates three times over the last 12-months and more hikes are in the forecast.
Interest rate hikes result in Canada’s big banks and trust companies raising their prime lending rates, which impacts mortgages. This means it’s going to cost a lot more to borrow money and cost more to carry debt.
For homeowners, the benefits of a variable rate mortgage are being stripped away. Those looking to renew their mortgage have big decisions to make: Do you go for a variable or fixed rate mortgage?
What Is a Variable Rate Mortgage?
A variable rate mortgage fluctuates, as often as every month, based on changes on the prime lending rate, which is set by the lender.
Ultimately, this results in how much of your mortgage payment goes toward paying down your mortgage and how much goes to interest. When the banks’ prime rate goes up, the variable mortgage rate follows suit which results in higher monthly mortgage payments. In some cases, your mortgage payment will stay the same, but a smaller portion will go to pay down the mortgage and a larger portion will go to interest.
Over the last number of years, the Bank of Canada had been lowering how much it charges banks to borrow. This was good news for those with mortgages. But because the Canadian economy is doing well, the Bank of Canada is now raising its rates.
Since variable rate mortgages are priced off of Prime, Canadians holding these kinds of mortgages are now being hit with higher mortgage rates.
With a variable mortgage, you cannot reliably predict what will happen or what the prime lending rate will be, say, six months from today.
What Is a Fixed Rate Mortgage?
Over 65% of Canadians have a fixed rate mortgage. When you lock in with a fixed rate mortgage, the interest rate charged on the loan remains the same for the duration of the term of the loan. If interest rates soar, you only pay the amount you initially agreed to with your lender.
For example, if you chose a five-year fixed rate mortgage and your monthly mortgage payments are $2,000, you will be pay $2,000 every month for the next 60 months. It doesn’t matter if interest rates go up or not, your monthly mortgage payments, and the amount that goes toward the principle and interest, stays the same for five years.
Factors to Consider When Switching from a Variable to Fixed Rate Mortgage
There are a large number of factors to consider if you’re thinking of switching from a variable mortgage to a fixed mortgage.
The biggest one of course is interest rates. Taking advantage of variable rate mortgages is a good idea when rates are low and expected to go lower. But that simply isn’t the case.
While interest rates are still historically low, that doesn’t mean interest rate hikes won’t hurt. It’s quite conceivable that interest rates could double from current levels over the near term. That means less money in your pocket and more money being wasted on interest payments.
When should those with a variable rate mortgage switch to a fixed mortgage rate? The best time is when interest rates are starting to rise, like they are right now. This doesn’t mean you try and time the perfect opportunity to switch to a fixed mortgage rate, it’s impossible to time the interest rate market.
Keep in mind, it’s not a good idea to wait too long. Interest rates have already turned around and are going up. And they’ll go up a lot faster than when they came down. The vast majority of Canadians prefer peace of mind, especially when it comes to finances. With a fixed rate mortgage, you know how much you’re going to pay and you can set your budget for the length of the mortgage terms.
Locking in a Fixed Rate Mortgage
Variable rate mortgages come with the option of switching to a fixed rate mortgage during the term of the loan. When it comes to traditional banks though, peace of mine comes with a cost. Not only are there penalty costs, but some traditional lenders insist that borrowers switching to a fixed rate mortgage sign up for a five-year term, regardless of what is left on their current loan.
Breaking a Variable Rate Mortgage for a Fixed Mortgage
When breaking a variable rate mortgage and switching to a fixed mortgage rate, traditional lenders will hit you with a penalty of around three months’ worth of interest at the current rate. Switching mortgages can also involve a lot of paperwork and legal fees.
Not only that, homeowners switching their variable rate loan for a fixed mortgage might only be eligible for rates offered to homeowners refinancing their mortgage, which is usually higher than the rates offered to homebuyers.
Canadalend.com, Helping You Secure a Mortgage
Interest rates are rising which means mortgage rates are going up. Because it’s more expensive to secure a mortgage, more home buyers and those looking to refinance are switching to fixed mortgage rates from variable rate mortgages. Not only does a fixed rate mortgage mean locking in at a low rate, more of the payment goes toward the principle over time, no matter how high interest rates go. To improve the terms of your mortgage, call the mortgage professionals at Canadalend.com.
How can Canadalend.com give you better options that the big banks and other private lenders? The independent, licensed mortgage experts at Canadalend.com work with hundreds of different private lenders. Many specialize in helping those who have bad or even no credit, are self-employed, and have unreliable income secure or switch to a fixed rate mortgage.
To find out what your fixed rate mortgage options are, contact Canadalend.com today or apply online and a Canadalend.com mortgage specialist will set up an appointment at your earliest convenience.