Fixed VS Variable Rates – Which to Choose
BELOW, ALEX MCFADYEN FROM THRIVE MORTGAGE CO GIVES US THE RUNDOWN! IF YOU HAVE ANY FURTHER QUESTIONS, BE SURE TO REACH OUT TO HIM.
As you know, a variable rate Mortgage and/or line of credit mortgage is based on the Prime Rate, here is your personal update from us on the recent Bank of Canada announcement. Last week the BOC maintained its position and held interest rates at 0.5%.
That being said it has sparked a WHOLE lot of questions lately such as:
– Should I lock in now?
– Should I renew early if my mortgage is up in the next 1-2 years?
– Can I reduce my rate still?
BOTTOM LINE: We still are RECOMMENDING if you have a variable rate, to remember WHY you took your variable, as the SPREAD between the current variable rates and fixed are nearly 1.25% or greater. If you have a variable rate at 1.80% or higher you should be talking to us RIGHT now about REDUCING your rate.
HERE ARE THE QUESTIONS TO ASK ABOUT STAYING VARIABLE OR NOT?
1) Would you be likely to refinance in the term? If so, stay variable. You may refinance to take advantage of lower rates, qualify for buying another property, consolidate debt etc. like credit
2) Would you possibly sell in the term? If so, stay variable. An average penalty on a 5 year fixed penalty is 4% – 6% of the balance of loan vs. 3 months of interest.
3) Would you be worried about a $12 per $100,000 of mortgage increase to payments for every .25% bank of Canada move? If not, stay variable.
4) Are you comfortable paying 1-1.50% more in interest to have a fixed payment? If so, maybe consider a static payment variable first! Then consider the fixed rate if this is not an option.
BOTTOM LINE on VARIABLE RATES:
“A true variable rate borrower goes into this decision knowing there will be fluctuations and they have to be prepared for articles to be posted (click-bait) with headlines about rising rates because it’s sexy and it sells!
Locking in right now ensures no potential for interest savings but riding it out as or now puts a borrower further ahead. Perhaps it’s more about your risk, if a news article makes you nervous and you can’t sleep at night in that case you may choose fixed and pay more for that reason alone.
Essentially this means, I view it as a psychological decision, not an economic one since statistics continually provide evidence that the variable rate borrower wins in the long run.
Those that had that “indifference” in 2017 rode out the increases and won big when their mortgages dropped to below 2% (some 1.5% and lower) for the last 1.5 years. Others in 2017 couldn’t sleep at night so they locked in. The indifferent crowd won, the nervous crowd lost – that’s not a judgment on either. Just an outlook on how there’s a “crowd” for variable and there’s a crowd that shouldn’t be for variable, and those crowds are best determined not by what rates will likely do but by how the market changes make them feel.”
BONUS: If you are currently in a mortgage or nearing the end of your term now is the time to review options like borrowing against your equity or renewing to lock into a lower rate. Contact Us to Discuss these options.
ALEX MCFADYEN
Mortgage Expert | Partner, Thrive Mortgage Co
Dominion Lending Centres
(604) 398-5575 ext. 700 | alex@thrivemortgage.ca
