A Great Alternative to “Locking In”
The Bank of Canada recently raised the prime rate again by 0.50%, setting a new record for rate increases in such a short period of time.
What does this mean for your payments if you have a variable rate mortgage?
A 0.50% increase to the prime rate = approximately $25 per $100,000 mortgage.
So, the average $500,000 mortgage payment will go up $125 a month.
Could there be more rate increases?
Yes, it is possible. However, if there are, there is just as much of a chance the prime rate drops as well, and those in a variable benefit from any future drops when the Bank of Canada triggers a recession.
Are you nervous about your payments?
The best solution for those who want to add more certainty to their payments for cash flow management reasons, is to switch or refinance to a fixed payment variable, currently around 3.2 to 3.3% (on average) – instead of 4.5- 5% for a fixed rate mortgage with a massive penalty to break. (900% greater than a variable rate penalty)
We continue to recommend variable rate today for anyone starting a new mortgage, as we have the biggest spreads in fixed vs variable in over 40 years (at anywhere from 1.50 to 2.00% spread on average, variable to fixed).
When you lock into a fixed, you will be self-imposing 6+ rate hikes TODAY, so even if it did go up 6+ times over the next 2 years or more, it is much more beneficial to stagger the increase over time than feel the effects immediately.
Additionally, when you lock in you will be increasing your potential prepayment penalty by 900% in the event that you break the new fixed rate mortgage for any reason. Keep in mind that 70% of Canadians break their mortgage for one reason or another. Let’s face it – life happens!
We can refinance to switch you to a fixed payment variable and even add a home line of credit assuming you have built up equity. A home line of credit can be a great tool to have instant access to.
Don’t forget – taking a variable mortgage is a strategy to pay the least amount of interest over the life of your mortgage, while maximizing your flexibility and control. Statistically speaking those who go variable and stay variable will save more money over the life of their mortgage.
If you have a fixed rate product or a fixed payment variable already – the prime rate “noise” does not affect you…so no reason to make any changes;)
Check out a new video from the President of Mortgage Architects that you may enjoy:
Below, you can check out the historical prime rates from the last 15 years. The prime rate goes up and down.
Those in a variable save more money over the term, plus they benefit from far superior terms and conditions, the biggest of these being the penalty (and if you have experienced a fixed rate penalty you will understand this – life happens!)
Remember, we are here for you! Call us at (647) 795-8700 or email us at [email protected], anytime. We’ve got your back for life 🙂