Time to lock in that mortgage?
Canadians accustomed to rock bottom mortgage rates have some thinking to do.
Although a bit sooner that some predicted, mortgage rates have finally begun to rise, with both Royal Bank and TD Canada Trust the first out of the gate.
The biggest jump is in the five-year fixed closed rate, which moves from 5.25% to 5.85% at both banks – the level every lender will reach before the Easter holiday.
Most mortgage specialists expect that this is just the beginning of several small jumps that will hike the cost of home ownership throughout the balance of this year.
So, is now the time to lock in to a fixed rate?
Probably, says Adrian Mastracci, portfolio manager at KCM Wealth Management in Vancouver. If you have a loan, he suggests, consider locking in a longer term rate over the next while – say two to six months.
If you can stand the inevitability of higher payments, a variable rate can still make sense, Mastracci says. But if you really have no wiggle room on increased payments, then take a close look at the 5-year fixed rate, he adds.
Before you commit, keep these tips in mind, he suggests:
- Posted rates are far different than negotiated rates.
- Lenders will negotiate to keep or get your business.
- Someone may see it your way so don't take "no" for answer.
- Consult a mortgage broker to shop around for you.
- Make sure you know your credit rating.
- Understand all your prepayment privileges.
- Analyze a few amortizations to get a handle on whether it makes sense to accelerate your loan.
Are you on the cusp of such a decision? What's your plan?
By Gordon Powers, MSN Money
Posted by: Christine | Mar 31, 2021 10:44:49 AM
I locked in for 5 years at 3.84 % the first of Jan 2010 and I am glad I did.
Posted by: Todd | Mar 31, 2021 11:27:14 AM
I have 3.5yrs left on my variable mortgage, but right now I'm sitting at 1.35% Locking into a fixed rate near 4% now just doesn't seem to make sense. There would have to be a lot of rising in the rates for the switch to make sense. Even if the rates moved up 4% higher over the next couple of years, the extra I'd have to pay up front before they rose would certainly outweigh the bargain I'd be getting near the end.
Posted by: UPLATEJOE | Mar 31, 2021 11:52:43 AM
Have a variable rate of 1.8, My variable is locked to .7 below base rate and I don't see that going up in any major amount that would make me want me to change. Variable rates are not going up until government changes base rate and even then we will not see base rate rise enough to make it better than locking in now.. people check you variable rate deals before locking in... I think it is despicable of the major banks to use this scare tactic. After the major meltdown, experts all agreed that Credit Unions are you best bet for service and protecting your money...everyone should take a stand against the major banks and move their accounts to Credit Unions.....
Posted by: Corey | Mar 31, 2021 12:33:04 PM
I have been pondering the same thing of locking in my variable rate since last Xmas... But when I further looked at locking in above 4% the extra cash was just to much to justify and I believe the bank rate will take awhile to get up above the 5 plus percent fixed rates some lenders are showing now? I have .75 below prime with Scotia Bank... which who knows where rates will be when my mortgage is up for renewal in 3 plus years?
Posted by: Jordan | Mar 31, 2021 1:34:03 PM
I agree with UPLATEJOE, the banks are just trying to scare people into locking into longer term, fixed rate mortgages that will earn themselves more profits. Also, where in the country does your payment actually increase when interest rates rise?? My variable rate held Royal Bank states that if interest rates rise the amount principle paid off out of each payment decreases as more of the payment is going towards the higher interest. The payment would stay the same, until such time as there is no principle being paid off, then I can see the actual payment going up. Am I wrong here?
Posted by: Jr | Mar 31, 2021 1:37:26 PM
My variable was 2.25% so I locked in at 3.85% at the five year fixed 2 days ago. I am not that happy right now but I think in years 3, 4 and 5 I will be happy I decided to lock in. I agree with uplatejoe it is dispicable to raise the rates without a rate increase from the BOC. It made me lockin now I would of held on longer to my variable if I could have.
Posted by: Maria | Mar 31, 2021 1:52:56 PM
I too struggled with lock in decision when 5 year rates were so low last summer. However, I am at variable with discount of .80, similar to the other stories. My mortgage is up for renewal in April 2012. I just figured that the money I am saving now, will buffer an increase in rates in the future. I believe that rates will not return to the astronimical rates seen in the 80s.
Also, we have to remember that it is proven through studies, that variable rates work in the favor of the consumer in the long run. If you can emotionally tolerate the ups and downs, I believe it is the best decision. Also, don't forget it keeps the bank on their toes, as they would be afraid of losing your business to their competitor!
If someone really good at math could develop a spreadsheet to show just by how much would rates have to increase to "flatten" the gain, for us with open variable mortgages at a discount over the last 18 months, well that would be fun to see.
Posted by: Dan | Mar 31, 2021 1:56:47 PM
I have a variable prime minus 0.25 therefore it's at 2%. I chose variable for the next 5 years even though banks are threatening to increase the mortgage rates. A good tool to play with the numbers is the mortgage calculator (RBC's is my preference). You can compare the different scenarios.
I could have locked in at 3.85% but decided not to. I figured, prime has to go up above 4.10 in the next 2.5 years in order to make sense for me to have locked in. I strongly doubt that will be the case.
Regardless which ever way you go just stick to it and don't stress too much about it.
I agree with JOEUPLATE the banks are trying to increase their revenues and getting a bunch of people to lock in their mortgage rates is one sneaky way to do it.
Posted by: Bonaventure | Mar 31, 2021 2:41:37 PM
VARIABLE BELOW PRIME SHOULD BE YOUR ONLY CHOICE!!
The great debate, are you strong enough to stomach the variable or scared about rates spiking to 21% and go for a Fixed locked in rate?
As a Financial Planner my recommendation has always been, variable, especially when the variable below prime came out.
One of the reasons people are scared is they remember or heard of rates during the early 80's, when rates spiked to 20%. Yes my mortgage rate was 18%, I took it for only six months when my rate jumped from 12 to 18%. Within a couple of months rates were back down to 12%. Unfortunately I know some that locked in 5Years at 21% on the recommendation of friends and family. Now adays there are many more choices, but the best one is always variable open below Prime!!!
Check my blog for historical rates. http://arewethereyetbd.blogspot.com/
During the last round of rate hikes from 3.75% in January 2002 to a high of 6.25% in July 2006 the prime would have had to go above 7% for individuals in the variable to START to be on the negative side, of course in the mean time over those 4 years they saved $$ thousands in interest costs.
The governments learnt from the 80's and are not about to repeat that mistake when they were raising rates 1% every month. Now its small increases, wait a few months, guage the effects etc.
The other reason is, that we are not out of this economic downturn yet. The lagging effect is unemployment. I still feel Canada's unemployment rate will go higher, housing still hasn't seen the downturn yet. Yes it is coming. How can Canada be the only country in the world to avoid this downturn?
We are led to believe everything is humming along, China is leading us out of this downturn, but this could be a house of cards that could fall at any time.
http://wallstcheatsheet.com/breaking-news/economy/ghost-towns-in-china-prove-gdp-is-a-farce/?p=3702/
In China it lend lend lend, don't worry about the back end where loans are not being paid back. No one is talking about that. Anyone can walk into a bank in China a get a loan, almost no questions asked, the banks are under pressure to lend money and don't worry about the repayments. GDP.
Bottom line, I don't think rates will spike like the 80's, at worst we will see small incremental increases that should still save $$ thousands for those in Variable below Prime.
Good Luck with you decision.
http://arewethereyetbd.blogspot.com/
Posted by: Victoria home owner. | Mar 31, 2021 4:09:19 PM
Unless you have alarge mortgage you should lock in. I myself have a small mortgage for Victoria. I would hate to have a $400 000 mortgage. If rates go up more than 2 or 3 basis points . We are going to see people(new home owners) lose their houses . I don t see it happening. Pure scare tactics = bank profits.
Posted by: mortgagewatcher | Mar 31, 2021 4:34:53 PM
Jordan .... One of two things wil happen: Either your lender will adjust your payments higher to cover the increased interest costs and stay within the amortization period you selected when you arranged the mortgage ot it'll do nothing until you're underwater. Whatever extra interest you face gets tacked onto your principal, thereby increasing both what you owe and the payback period for the mortgage -- which could be several years if you're heavily leveraged. The unchanged payment is an illusion as you'll be slowly falling behind in getting your mortgage paid off.
Posted by: dave | Mar 31, 2021 4:37:19 PM
any mortgage guru or financial advisor I have spoken to over the years will tell you that a variable rate mortgage will always win the race over time on a fixed rate mortgage. When all the numbers are crunched after the end of your term you will have paid less interest on a variable rate mortgage. So ride it out. No fear!
Posted by: JY | Mar 31, 2021 5:01:01 PM
I have a variable rate of 1.25% (Prime - 1). I have 3.5 years left on my mortgage term. Now I am puzzled to lock in or not. What do you guys think?
Posted by: Dazed and Confused | Mar 31, 2021 6:15:36 PM
I think the consensus above is stick with Variable. The rate would have to rise a LOT before your rate would equal the 5-6% the locked in rates are at.
I AGREE that it's despicable that banks are raising their rates before BoC raises theirs! It's money-grabbing at it's worst! I locked in at 5.85% with TD on my mini-home and the 5 year term is up in October. I was going to swallow the few month penalty by renewing the mortgage before June, but if the rates are starting to go up already, I'll have to shop it around this time. I'd love to sell and get into a house, but can't get over the $125,000 increase in overall price over what I have now... Way to keep the 'middle class' under their thumbs!
Posted by: Don | Mar 31, 2021 6:29:10 PM
I was around in the 80's when it went to hell. A good mortgage rate was between 15-18%. I locked in my mortgage in a year ago. 4.5% is still cheap borrowing. I would rather know I am safe than suffer through the bust after the boom.
Many say it wioll never happen but they were saying that about the recession too....it would never happen. Interest rates dont have to up a little at a time...they can jump 5...7...10 points in a heartbeat. Been there....seen it.
Posted by: Trevchev | Mar 31, 2021 6:42:26 PM
History shows that over any given period(25yrs) a open mrtg costs less than locking in for fixed rates. Why would the next few years be any different?
Posted by: Jay | Mar 31, 2021 9:04:57 PM
Just so everyone knows, banks fixed rate mortgages are dependant on the bond market, not the prime rate. That's why they can change when the prime rate stays the same.
Posted by: Susan | Mar 31, 2021 10:02:06 PM
Feedback, please! I have a mortgage $220k remaining (fixed rate at 4.55%) due Nov 2010. I have an option of renewing at my financial institution 3 months earlier. I'm seriously considering going for variable rate leaning towards 5 year closed (but not sure if this is better than open). Should I renew earlier or wait until Nov expiry to shop around? I don't know the rates that are out there. Any suggestions?
Posted by: Bonaventure | Apr 1, 2021 11:20:29 AM
Open Variable below Prime is always the best choice for a Mortgage. Over the long term this will always save you $$ thousands. As previously posts have mentioned, your payments do not increase or decrease when Prime moves up or down. What is adjusted is the $ amount that goes to Principle and Interest.
Now the flip side is investments in Term Deposits, Gics. This is where you want to lock in Rates using a Ladder approach. Over the long run this has proven more beneficial to investors.
Again- for a mortgage - Open Variable below Prime!. The next option would be a 3 and then a 5 year fixed Variable below Prime.
Good luck.
Posted by: Joey | Apr 1, 2021 3:56:03 PM
I am a realtor in quebec. I have noticed many alarming trends in the last 10 years and these last 2-3 in the realestate market have taken the cake.
If we revisit the year 2000 in my area just prior to the housing boom in canada, just after the tech bubble bust, you will notice huge changes. The average 100k home in the year 2000 is now selling for 200k. Gasl prices have doubled or trippled and the majority of utilities, groceries and others have also risen considerably out of sync with the average salary earned. This is signifigant because if you take any employee and ask them if their salary has doubled in the last 10 years virtually everyone will say it hasn`t. The conclusion to this is it is a very expensive time to be alive compared to 10 years ago.
The question must be asked, (in relation to home values) how did we get here and why haven`t things corrected themselves. Speculation drove up home prices from 2000 to around 2006. At that time they began to plateau and flippers (buying a home for the sole purpose of selling it a short time later at a signifigant profit) were a thing of the past again. 2007 brought about the beginning of the stock market decline and all things evil in relation to the US housing market when we found out what these bankers have been doing all this time.
Housing values were destroyed in the US and a heavy correction should have occured in canada aswell. It didn`t. Home values remained staggeringly high in comparison to their baseline build costs. In our area a new 200k home is built for between 70k-100k plus land value which is anywhere from between 20k to 50k. This means that sales prices for existing homes continue to be grossly overvalued. How is this possible... supply and demand is the natural response but it is so much more then that.
The major canadian banks maintain a vested interest in keeping these overinflated home values high or face a flood of negative equity mortgages on the books. The easiest way to do this was to extend term lengths. As stated earlier, home values do not correspond to salaries earned in recent history. The only way for purchasers to qualify was to extend mortgage lengths. There was a time when it was almost unheard of to have a 40 year mortgage. In our office between 2007 and 2009 45% of all mortgages were to first time home buyers with 40 year terms. Ridiculous! Without acess to these jumbo length mortgages, qualified buyers had dried up and a decrease in home values was sure to follow. Thus, to protect their books and investments, welcome to the new age of lending. Bankers found a new way to qualify you and screw you over in one big swoop. The first 15 years of mortgage payments pays down roughly 10 percent of the principal. Take a 25 year old first time home buyer and at 40 they own virtually the same principal on their mortgage. Thats ok though right... the home price will have gone up signifigantly in the next 15 years. Wrong.
The banks are using these loans as a stop gap measure knowing full well that things are out of wack. In 15 years time, salaries will have corrected enough to bring inline the values available in the year 2000 again. So a finacial lifestyle that was affordable in 2000 will not present itself again untill the year 2020-2025. I can`t wait. In the mean time it is very unlikely there will be any real measureable increase in housing prices. There is no measure of data anywhere to support a continued upward trend in home prices other then the old saying ``housing prices always go up``. Homes are like any other commodity. They have a cost of production. At the moment that cost is substantially lower then what the general public is paying for them.
In late 2009 the canadian government stepped in and stopped the banks from continuing this perversion. They annouced no more 40 year mortgages. The cap was pushed down to 35 years. It would have been pushed down even further but that would have lead to severe problems in 2012-2014 when 40 year mortgages on 5 year terms come up for renewal. Technically the 40 year mortgage would have 35 years left and another 5 year term. If the maximum term length had been reset by the federal government to 30 years then a tremendous amount of home buyers would not qualify to remain in their own homes when their renewals come up in those years.
Home buyers are being fed a lie. Your homes are not worth their current values. You can thank the banks for keeping them high in the interm. If you expect to gain liquidity via an increase in value over the next few years... keep dreaming.
Now throw in the higher interest rates and wow. Goodluck.
One last thing. It is generally agreed that all the major financial instituions made huge gambles in the form of mortgage backed securities which turned out to be worth a fraction of their true value. Every major bank annouced writeoffs to their books. Bank shares tumbled and bailouts were issued. Overnight lending rates dropped to almost nothing. Tax payers are outraged. Banks pulled the next big scam in getting tax payers to pay for all those mistakes... not by bailouts... but by the spread they are now making on all the loans they have been issuing at staggering terms. Bank money is virtually free, but no additional savings have been passed onto home buyers. Why not you ask... because the banks are using the extra spread and profits to make back the losses they incurred from their own mistakes. Thanks guys.
Banks make bigger profits, erase losses and protect their books all on the back of home owners. Wonderful.
My advice to you is stop living the lie. Be informed on what your buying. The only real ``investment`` in realestate these days is revenue generating properties. Untill home values come back inline with real production costs and existing salaries,... tread very carefully.