As many of you may have seen in the media recently:
“Rates are going up,” and “Mortgage rates have to go up.”
We all know the media tends to focus on the negative – but rest assured, rate changes are nothing new for us as Mortgage Brokers, and this news does not change our client recommendations.
Is inflation high right now? Yes. But for the Bank of Canada to even consider raising the prime rate, we’d need to see sustained inflation for 6+ months to move the needle in any meaningful way.
For reference: a 0.25% increase in the prime rate = $12 increase per month per $100,000 mortgage borrowed.
Below just a few of the many reasons to maintain your variable rate mortgage – or refinance and get a new variable.
1) The primary reason: Once you lock into a fixed rate, your future potential prepayment penalty goes up 900% on average.
No client plans on breaking their mortgage, but over 70% of Canadians do for one reason or another, and over 85% of Canadians will either move or refinance every 3.5 yrs. In other words, the probability is high. Simply put, life happens.
2) If you lock in, you are self-imposing a rate increase that is 4 times greater than any Bank of Canada rate increase, as the average fixed rate is 1.00% higher than variable on average.
3) The prime rate would have to go up 9 times in the next 5 years for you to lose money comparatively (when comparing fixed to variable today).
4) If you are concerned about your payments going up, give me a call. We can lock into a variable rate around product 1.20 to 1.45% with a fixed payment 🙂 Win-win. We are happy to help with that at Mortgages.ca.
5) If you think that the prime rate will go up, simply increase your payments now (maybe $200-300 a month). This way, you are paying off principal instead of interest while you wait, and you maintain the FAR superior terms and conditions of the variable product!
Pay off your mortgage (ie: put it in your pocket – not the bank’s profit margin).
6) The Banks/lender will call you to fear monger you into locking in your variable rate to a fixed within weeks of any prime rate increase:
Why? Because it is what is best for them, not you. The fixed rate is more profitable for the banks, especially the 5-year fixed.
Don’t get mad. They are a business, and a very successful one at that. Just buy more of their stock and enjoy the dividends.
The prime rate goes up and down – not that often, but it happens. The bottom line is that those who take a variable rate mortgage, pay less total interest than those who go fixed (every time for the last 50 years). PLUS they benefit from far superior terms and conditions – if life happens.
Life is Variable – Your mortgage should be too!
Stay strong – and stay the course 🙂