I was recently interviewed by a mortgage industry publication about my thoughts on fixed vs variable. Here is a link to the video, I will share it on my blog once we have a complete transcript.
In the mean time, I wanted to dig a little deeper, so I wrote the article below! If you have questions about your mortgage, please don’t hesitate to contact me anytime! (even if you are a little nervous about rates).
It’s All Hype
If you are currently a variable rate mortgage holder, than no doubt you have probably asked yourself… “Should I stay variable or lock my rate into a fixed term?” It’s a hard decision to make simply because it’s hard to predict what interest rates will do over the next 5 years!
So how do you decide? Fixed or Variable… especially when all the pundits, economists and news outlets have differing opinions on where the market is going and all of their opinions are designed to scare you?
Let’s take a big step back. Every January for at least the last 6 years I have had to deal with the speculation in the media about what interest rates will be doing in the year to come. Each year the media seems to get increasingly more provocative and drives the hype harder. Every January, it seems like I am talking more and more of my variable rate clients off the ledge.
This year is no different, in the last couple of weeks I have had panicked clients calling me as a result of the recent media speculation that we will see interest rate hikes this year. And I don’t hold it against them, the media is good at their job. I love when my clients are concerned about their mortgages… and I love to answer questions!
However, did you know that almost all of our lenders actually dropped their rates this week? Odd isn’t it. Why would the media be reporting one thing… while the market is doing something completely different?
Don’t lose sight of the fact that the media isn’t in the business of providing clear and accurate information, they are all about selling advertising and getting people to read articles. Hype sells. Boring doesn’t.
What’s Actually Going On
The most recent frenzy is based on the discussion that the U.S. MAY increase interest rates by 0.25% in the spring, which MIGHT lead to a possible rate hike in Canada, which MAY be implemented by the end of the year. First thing we have to look at is who is the source of the speculation? Economists, experts, etc? Who is doing all this speculating being reported by the media? From what I can tell… no one you should be concerned with. Don’t buy the hype.
Generally when interest rates are set to increase, you can expect the Bank of Canada; who sets the benchmark interest rate, to give us clear and ample warning of the changes that are coming. They are the authority.
Here is the last Bank of Canada Rate Announcement – The next announcement is scheduled for January 21st 2015. I will be more than happy to share my thoughts then as well.
My interpretation is that the language in the BofC announcements has been very weak and does not indicate that hikes are coming soon. Canadians have been experiencing a new sense of normal over the last 10+ years with interest rates generally being under 5% for this entire period. We have created a culture that is used to low interest rates. The Canadian government will have to proceed with caution when increasing interest rates even if the only reason is political.
For anyone holding a variable rate mortgage right now, please don’t lose sleep at night.
You’re saving more money right now with your variable rate than you would be if you locked in.
Even if rates did go up, let’s look at the math. A 0.25% interest rate hike in the prime rate translates into a payment increase of $12.96 per month per $100k of mortgage balance. As the Bank of Canada generally only moves in 0.25% increments every couple of months, it’s highly unlikely that we would see a combined 1% hike in a year. Needless to say, if rates do start to go up, you will have lots of time to figure out what your options are and you can make a decision at that time.
Please don’t lock in right now, stay variable and enjoy this low interest rate environment.
The other upside is that by staying variable you protect yourself from paying high penalties down the road if your circumstances change. The penalty to break a variable rate mortgage is 3 months interest, the penalty to break a fixed rate mortgage is the greater of 3 months interest OR the Interest Rate Differential (which can be a lot higher).
Increase Your Mortgage Payment
Instead of switching your variable to a fixed rate, maybe you should increase your payments instead? I can help you figure how much your payment would increase by switching to the fixed rate, and instead of executing just increase your payment. This will work to pay down your principal balance faster!
This will also create a cushion in your balance that insulates you better from rising interest rates (less money owing means less interest you pay).
The more you can lower your mortgage balance, the better you protect yourself… regardless if your rate is fixed or variable.
But my best advice, whatever you do… please stay calm. I’m confident we’ll be back having this same discussion next January!