Approximately 32% of Canadians are in a variable rate mortgage. Up until very recently, rates have been declining steadily for the better part of the last ten years, so this has worked well.
Recent increases in mortgage interest rates understandably trigger questions and concerns, which are best handled by a discussion with me, an independent mortgage expert, not the lender. There are details & conditions you might not be aware of, and there is no guarantee that a lender will cover all the bases.
Over the last several years, there have been headlines warning us of impending doom with both house price implosion, and interest rate explosion. Other than a couple very localized & brief instances, very little of this doom & gloom has come to pass.
Before accepting what a lender may offer as a lock-in rate, I highly recommend having a quick discussion with me to review all of your options. Especially if you are considering freeing up cash in the future for such things as renovations or travel or investing towards your children’s education. Even if you just want to lock in the outstanding balance, having a conversation about pre-payment penalties is crucial because they will change when you switch from a variable to a fixed rate.
In the vast majority of variable rate mortgages, the usual pre-payment penalty is 3 months interest. There are exceptions to every rule – if you opted for a low-rate no-frills type of mortgage, it may come with a larger penalty. But 3 months interest is usually the standard. On the other hand, the pre-payment penalty for fixed rate mortgages can be quite substantial, even if you’re early on in the term of the mortgage. It’s known as the interest rate differential (IRD) and is based on factors such as your current rate, the posted rate for a comparable mortgage and the amount of time left in your term. It’s a fairly complex calculation and is typically many times higher than the standard 3 months interest penalty.
These massive penalties are designed for banks to recuperate any losses incurred by clients (you) breaking and renegotiating the mortgage at a lower rate. And so locking into a fixed rate product without careful planning can translate into a significant financial downside for the client.
Another common misconception involves the lock-in rate. “Locking in” your mortgage doesn’t freeze the current rate on your mortgage. Rather, you will lock into a rate offered by your lender, which could be based on the length of time left in your term. Or you could be forced to start a new 5-yr term, and there is no guarantee that the rates offered will be current best rates.
On the other hand, there is something to be said for the peace of mind that comes with having a fixed rate mortgage. You know what your payments will be for the full term and never have to worry about them increasing. If it helps you sleep at night and alleviate any concerns, maybe locking in is the better option. Generally speaking, there is no ‘correct’ answer that applies to everyone because everyone’s situation is unique. There is only a ‘specific-to-you’ answer, and the best way to come up with that answer is having a conversation with me, your mortgage broker.
Life is variable, perhaps your mortgage should be too.
As always, if you have questions about locking in your variable mortgage, breaking your mortgage to secure a lower rate, or any general mortgage questions at all, I’m here to help! Contact me today at 250-338-3740
(with info taken from the monthly DLC newsletter)