So, what about this recent Bank of Canada interest rate increase?
- I am not locking in myself;
- I am personally staying variable;
- For a variety of reasons that I will elaborate on;
- This does NOT mean that you should for your own reasons;
If your discount from Prime (currently 3.20%) is 0.50% or larger – then the variable rate product still holds a valued position.
If your discount from Prime (currently 3.20%) is 0.25% or small – then you may consider converting to a fixed rate, BUT…
Keep in mind the penalty to prepay (i.e. refinance or sale of property) a variable early is ~0.50% of the mortgage balance, whereas if in a (4yr/5yr or longer) fixed rate mortgage the penalty can be closer to 4.5% of the mortgage balance ***depending upon which specific lender you are with and how long of a term you lock in for.
There are many considerations before locking in your variable rate, and we spoke about them when we made the decision to take the variable rate together:
– many questions to ask;
– most of which the lenders are unlikely to ask you;
– your lender is re-active, not pro-active;
– you need to be pro-active;
– and sometimes being pro-active results in no action being taken at all;
It is usually to the lenders benefit that you lock into a fixed rate, rarely is it to your own benefit – unless of course we see 3 more consecutive rate increases (which I am no ruling out). There are a multitude of changes happening within the mortgage industry, and I think that the Liberal government is learning along the way too. At the moment many decisions are being made from a biased frame of mind; i.e. because we have had two recent rate increases this must mean still more rate hikes are on the way.
The government may well have overstepped with this recent rate hike and there may be a pullback within the next 6 to 12 months? That is the beauty of the variable rate being dependent on the Prime rate set by the Bank of Canada – it can always move.
Back in 2010 rates increased 0.25% three times, and that sat stagnant for nearly five full years before two, 0.25% decreases back downward.
In other words the last time Prime was pushed as high as it stands today, it sat there for five full years. And was then cut.
Something to think about?
When you and I decided that a variable rate mortgage could work to you advantage we knew that your household income could sustain a little volatility. Well, volatility is here – but is it here to stay is anyone’s guess.
The next Bank of Canada meeting is October 25, 2017.
I will be watching and waiting.