Is it Time to ‘Fix’ Your Mortgage?
There are two different ways a mortgage can go: it can be a variable rate mortgage or a fixed rate mortgage. Up until recently, the idea was to take a variable mortgage to start and then go fixed mortgage later if you find a sweet spot that you liked. The idea here was that variable gave you more leeway to break the mortgage if you needed to (no IRD) and a bit more flexibility, plus they were cheaper since you didn’t have to pay a premium on them. Fixed rate mortgage of course locked into a given interest rate for a set period of time; anywhere from six months to five years or more, though five years is the most common.
Some people stay variable throughout much of the life of their mortgage, but now might be the time to break old habits and go with a fixed rate mortgage. Where once you could get by quite happily with a variable rate mortgage, homeowners may now find that sticking to the old ways will cost quite a bit of money as the prime rates shift around and inflation is shrouded in uncertainty.
Let’s break this down, shall we? Where once the two mortgages were largely chosen on personal preference and circumstances, you now have some outside factors playing into the choice. Inflation has climbed to 2.2%, provoking many banks to try to hold a benchmark rate. Uncertainty in the rest of the world economy (in particular the Eurozone) has many people and banks nervous. And the spread between variable mortgage and fixed rates has shrunk while the trend of downturns in the market is uncertain. All of this means that sudden spikes in rates are quite possible.
Furthermore, mortgage rates are at a historical low. Mortgage rates from lenders and brokers can go as low as 2.39% (First Calgary Financial, 1 year fixed term) and many banks hold the line at around 5% for a five year term (fixed). However, these low rates are not going to last, particularly with the new rules being placed by the OFSI (Office of the Superintendent of Financial Institutions) and a definite push from the government to moderate the housing market which is currently hot precisely because of the low rates.
So, the combination of low rates and the fact that they won’t last means that now could be a very good time to switch to a fixed mortgage rate. You could end up saving a bundle of money on your mortgage over the long run.
Before dashing off to do that though, there are still the personal financial factors to take into account! Fixed rate mortgages are going to look very good if they suddenly jump around and you aren’t caught in the whirlwind, but there are other considerations. You shouldn’t take a fixed rate mortgage if you plan to sell your home soon (the IRD or penalty calculations are atrocious), but you shouldn’t go for variable if you are uncertain about your income or you only have a small down payment. It’s a decision that cannot be taken lightly.
Low interest rates now mean that no matter which type you take, you are going to save some money; however, you should also be looking to the future and trying to decide based on where you want to be a year from now or three years from now. Take some time to think about your choices and remember that what’s gold today, may be gone tomorrow.
If you have additional questions about this topic or others, please contact us at Higgelke Mortgage Group.