Jul, 11 2017

Written by Steve Pipkey

Should You Lock In Your Variable Rate Mortgage?

In July 2017, there’s been a lot of noise in the mortgage rate market – “RATES ARE GOING UP!” Clearly, we’re getting inundated with people asking whether or not they should lock their variable rate mortgage into a fixed rate. Well, should you? It really depends on the following factors:

What’s Your Current Variable Rate?

We’ve always been very pro-variable rates at SPIN and often recommend them to clients when a) the spread is attractive when compared to fixed rates, b) the upward pressure on rates is either nonexistent or immaterial, and c) the financial profile warrants it. In today’s market, many of our client’s have variable rates ranging from 1.75-2.25%. These are great rates. Chances are, if you lock in you’ll be opting for rates in the 3% range. This doesn’t make much sense to us as you’ll be forfeiting the lower rate benefits purely out of the fear instilled in you by the media. Generally speaking, we’d hold tight. However, if you’re going to repeatedly stress about it and lose sleep, then by all means go for it. An alternative would be to set your payments higher (perhaps equal to the prevailing “lock-in” rates) to hedge against rate increases. However, if you have a high variable rate, with little or no discount, it would be worthwhile to renegotiate your rate and potentially your term.

How Long Is Your Term?

If you’re nearing the end of your term, there’s more reason to re-evaluate your mortgage as you’ve already received the majority of the variable rate mortgage benefit. If you have a substantial amount of time remaining, it will depend on what your rate is. If you have a stellar rate, our thoughts are to stay put.

What Are Your Variable Rate Mortgage Plans?

If you intend to sell the property, refinance, or change the mortgage in a material way, you’re better off to keep your variable rate mortgage. The penalty to break a variable rate mortgage is only ever equal to 3 months interest (unless it’s restricted), which is both nominal and predictable. If you convert to a fixed rate, you lose control of your penalty. You’ll pay the greater of 3 months interest or the IRD (interest rate differential), which can be substantial and is based on market rates at the time of discharge. Yes, you can port and blend most fixed mortgages, but there can be timing issues and rates are often less attractive.

What’s Your Financial Profile?

If you are sound financially and have a great variable rate, stick with it.

Mathematically, the variable rate has always outperformed the fixed rate. It’s not for everyone, but we’ve always preferred it. Are rates going to go up? By the sounds of it, yes. It’s impossible to predict by how much, but the fact remains that the economy is still very weak – obviously, there are other factors at play. Does that mean you should call us or run to the bank and lock in? No. Consider the factors above and make an educated decision.

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