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5-Year Fixed Rates Drop Due to Predicted Prime Rate Cuts
Mortgage News | February 9, 2019
What does the arrival of a dropped 5-year fixed product mean for the variable versus fixed debate? Frankly, not much.
James Harrison, AMP
President / Mortgage Broker
As of this week, economists are predicting the prime rate could actually start coming down. As a result, banks and lenders have been dropping the 5-year fixed rates and removing the discounting on the variable products so as to encourage clients to go fixed.
Don’t Be Fooled: We’ve Seen This Strategy Before
The banks have been aggressively pushing the 5-year fixed rates for the past 8 months now, using the fear over the last few rate increases as reason enough to consider the switch. But lest we forget: the 5-year fixed product is the most profitable product for the banks, not you.
When the prime rate goes up, banks systematically try to convince variable clients to break their mortgage and instead lock into a new fixed rate that is generally 0.75%-1.00% higher than the current variable rate. And based on 2018’s recent Mortgage Consumer Report, this fear mongering works — noting at least 68% of Canadians are talked into a fixed rate product.
But rest assured, when our variable clients call–panicked after a prime rate increase–our answer is always the same:
Our Clients: Do we lock in?
Us: No!
An Alternative (& More Effective) Strategy
Say NO to 5-year fixed but you should increase your payments as if you did lock in! This way, you are paying off your mortgage faster without the higher interest cost and terrible terms & conditions of the bank’s 5-year fixed product.
Speak with a Mortgage Professional
Regardless, you should always work with a professional and experienced mortgage broker in making these decisions. By definition, a mortgage broker works for you, independent of the bank’s interests.
If you’re considering a switch and your bank suggests a 5 year fixed rate product, make sure to ask them “why?” Think critically and get a second opinion from a mortgage professional. It’s your hard-earned money, it should stay in your pockets.
In Summary:
- Go variable
- Increase your payments from day one as if you went fixed and
- Always stay loyal to yourself first–not your bank.