10 Jul

Time to consider locking in your variable rate?


Posted by: Aneta Zimnicki

These are interesting times. Our economy may not be doing so well. In general, fixed mortgage rates move in tandem with the bond market while variable rates move with the lender’s prime rate, which is based on the Bank of Canada’s overnight rate, as per announcement noted above. The bond yields have been falling since late 2018. We are getting to a point where the net interest rate on your variable rate mortgage (usually expressed as prime minus x, with today’s prime being 3.95%) is converging with fixed rate.

If you current have a variable rate mortgage, consider calling your lender and see what their fixed rate offering is. There is no one right answer of whether your should do variable or fixed, but it’s worth getting the specific information from your lender as part of you decision making process.

A few things to note:

Understand that mortgage penalties for fixed rate mortgage are different than variable rate. This especially matters depending what type of lender it is. See related blog here  If you need the flexibility of breaking your mortgage (for example, not only if you sell property, but want to take opportunity to refinance), variable rate has the certainty of lower penalty cost.

Determine what your term length goals are. Depending on lender, you may have to choose a term length that is longer than your current term left, essentially extending your mortgage term. There is no point locking into a term length that is not reflective of your goal, as it may cost you in penalties, as noted above. You may want to check with lender about portability, but I highly recommend to never assume that that is a guarantee. The worse case scenario is breaking your mortgage with penalty.

Do you think variable rate will drop further? Maybe you want to continue to ride the wave down, and get savings in that way. This decision of course is up to you based on your assessment of the market and economy. Similarly, do you think fixed rates will go down even more? Maybe you want to wait and see.

Note that the mortgage product market has changed significantly over the years. There are now multiple mortgage product categories, with different rate offerings. See related blog here. This may or may not affect the fixed rate offering, when you request to lock in. So if you compare with friends and colleagues, keep this in mind, it may not be apples to apples. For example, rental versus owner-occupied, insured versus not insured (ie. mortgage insurance like CMHC). Sometimes insured mortgage rate is lower, so if your property was historically insured, lender may be able to work something out, but it may be up to you to point this out to lender’s attention.

It may be even possible that it is worth your while to break your variable rate mortgage and switch to another lender, if their fixed rate offering is better than your current lender. However, you would have to re-qualify with the new lender. This is a more detailed conversation to have with mortgage broker. At this point, if you are ‘ripping the bandaid’, you can consider extracting equity (refinancing ), or restructuring mortgage (possibly lowering monthly payments and improving your cashflow or adding line of credit).

10 Jul

Bank of Canada rate announcement

Latest News

Posted by: Aneta Zimnicki

Bank of Canada holds the rate steady. Your variable rate mortgage remains unchanged. Sombre language used. The general speculation is that there is possibility of rate dropping. We will have to see if the boat will be rocked before the federal election. Next announcement September 4.