As interest rates rise in 2022, mortgage experts are receiving panicked calls from Canadians who own a variable mortgage or are about to renew them.
Bank of Canada raises the benchmark lending rate a full percentage point to 2.5%. And with that, Canadian banks are now increasing their prime lending rate to 4.7%, the highest in over ten years.
And the results? A serious impact on the Canadians who holds a variable mortgage as it tends to increase or decrease with the BoC’s prime rate. So, what should you do now?
Don’t worry. Here in this article, we will focus on—can you lock in a variable rate mortgage, or should you convert it to a fixed rate. And what will be the effect in the long run?
Variable rate mortgage and fixed rate mortgage—which one should you choose?
Fixed-rate mortgages have more interest rates than variable-rate mortgages. As a variable mortgage holder, you can think about staying secure at a lower rate. And that is quite normal.
There is a perception—fixed-rates are safe while variable rates are uncertain. It is somewhat true as the variable rate is tied to prime and may increase or decrease. But obviously not at a roller coaster rate.
Your variable rate would not double overnight, as per year, BoC comes with eight prescheduled rate announcements, where the rate is not more than 0.25% per announcement.
Can I lock to a variable mortgage or switch?
Whenever the interest rates have started to increase, many house owners get confused about whether they should continue with the variable rate or switch to a fixed-rate mortgage.
Well, it is not easy to make this decision instantly. Some of us feel we should stay in our comfort zone with a fixed interest rate and mortgage payments. As it would not create any pressure on our financial conditions.
Although, if you think about switching from a variable rate mortgage to a fixed rate mortgage, in that case, you have to break your current mortgage. And this will come with three months prepayment penalties on your mortgage interest.
Many companies do not charge this penalty to their customers when they want to switch from a variable mortgage to a fixed rate or other long-term. However, some lenders charge a penalty when you convert from a variable to a fixed-rate mortgage.
Things you should consider
- Now you should consider how much time you have for the mortgage term. It will help you to determine whether you should switch or not. Your costs will decrease as you approach your term’s maturity. However, if the rate continues to increase, converting into a fixed rate mortgage will save more interest costs in long run.
- The second thing is how frequently and how much the rate changes. The variable rate fluctuates and goes higher than the current fixed rate over time. While in the short term, the fixed rate would be a little pricy.
A mortgage is not just all about rates
It is not as simple as you think. The mortgages are not just all about rates. You find other options also rather than converting between straightforward variable or fixed-rate mortgages.
You can set up a variable-rate mortgage with a fixed payment. It’s just—when the rate spikes, you have to pay more interest than the principal and vice-versa when the interest rates decrease. And if you try to analyze from a budgeting perspective, the amount you will pay remains the same.
Taking help from the professionals
- If we talk about mortgages, the best decision is to take help from a mortgage specialist. They will help you to find out the implications of each option. It, in turn, will be beneficial to setting your future goals.
- They also help you find other solutions that will suit your needs. Like shorter mortgage terms, longer amortizations, or higher frequency payments.
- Mortgage professionals also advise going for hybrid mortgages and home equity lines of credit (HELOC). It is basically the combination of variable and fixed-rate mortgages, where one part is set as a variable and another as fixed-rate mortgages.
When it’s about lock in a variable rate mortgage, you have got plenty of options to choose from. So, the wise decision is to do your research, compare the pros and cons of a variable and fixed-rate mortgage, and then select the right one according to your financial conditions.