Is it finally time to lock in your mortgage?
Is now the time to lock in your mortgage? No, not yet, mortgage broker David Larock maintains.
Traditionally, a five-year fixed-rate mortgage has been about 1.5 percentage points higher than the five-year variable rate, depending on the prevailing yield curve. Today, you can get a five-year fixed mortgage for much less than that.
Fixed-rate mortgages have traditionally been popular among first-time buyers looking for predictability in their payments. But the Bank of Canada's recent decision to stand firm on rates is likely going to keep variable-rate mortgages attractive for some time.
Larock says he’s able to offer his clients five-year variable-rate mortgages at prime minus 0.4 percentage points, or 2.6 per cent. Five-year fixed-rate mortgages can be had for 2.99 per cent, he says.
Most studies says that variable-rate mortgages have worked out to be better than fixed-rate mortgages over the past 25 years. And the difference was fairly dramatic, saving consumers thousands in potential interest costs. But is this likely to be the case going forward?
Yes, says Larock.
"I think borrowers who are currently in the market for a new mortgage and who are comfortable with fluctuating payments will save money with a variable rate over the term of their mortgage (as long as it is five years or less).
I also think that borrowers who already have a variable-rate mortgage (especially a deeply discounted one) should think twice before they convert to a fixed rate in today’s environment."
Are you grappling with the mortgage rate dilemma? What choice are you leaning towards and why?
Posted by: Jacob | Dec 5, 2021 8:42:51 PM
Variable for me, no matter what. There is no other choice. Never lost with this choice and never will, and I have over1 million on the line. My bank gives me an insanely low rate.
Posted by: Freedom 75 | Dec 6, 2021 3:01:53 PM
I am holding a 2.5% variable rate mortgage that comes due for renewal in 11 months. I am on a fixed income and the going rate has been great for me. Do I continue on or lock in for a 5 year, fixed rate at renewal time? It is a big choice for a senior. But I have to say, I like the variable risk.
Posted by: Western Guy | Dec 7, 2021 6:57:14 PM
On one side variable has easily won out over the last 30 years while rates have slid from 18.5% to 3%. In that declining market variable will always beat the fixed 5 year rate.
Another big plus for variable is no breakage fees. Recently I learned to my chagrin that to break a fixed rate mortgage I had was going to cost 20K. Why you wonder? In calculating my interest rate differential the bank used the difference between the posted rate when I got the mortgage and the current posted rate on the 2 year mortgages. It didn't matter that I had a 3% reduction from that posted rate I am penalized based on it and not my actual rate. Basically instead of making up the banks lost interest on the .7% spread over 2 years I am making up a 3.7% spread. Nasty little hook in fixed rate mortgages especially given the average person only owns a house for 4 years.....
On the other side rates are now at 3%. How much lower can they go? It has been the steady drop that has historically made variable so good and that won't continue. If we had a Icelandic bank meltdown tomorrow how many of you could handle 9% interest (ie. your payments tripling?) That is the risk you face going variable.
Part of this comes down to where you are in your mortgage. If you only have 5 years left you wont care if rates spike in 4 years as you will only have 20% of your mortgage left and the increase won't hurt much at all.
If on the other hand you have 40 years left in 4 years you will still owe 97% of your mortgage meaning a rate spike could be very harmful to you.