As rates rise, is now the time to lock in a fixed mortgage? Here’s what to know

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Bank of Canada’s rising interest rates have some variable-rate mortgage holders thinking about locking in a fixed rate, according to experts who spoke to Granthshala News.

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But the peace of mind that comes with a steady rate has trade-offs that homeowners should be aware of before converting, they warn.

Victor Tran, mortgage and real estate specialist at Rate.CA, says that since the Bank of Canada raised its policy rate to 3.25 percent on Sept. 7, customers inquiring about locking in fixed rate mortgages have seen them ” bulge” is visible. of 75 basis points.


“I think this most recent increase has definitely got more Canadians worried about their finances,” he says.

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Variable rate mortgages with adjustable payments see monthly mortgage costs increase with central bank rate hikes, while homeowners with fixed mortgages feel the pain of higher interest rates only when they renew at the end of their terms.

With the Bank of Canada’s policy rate increasing by 300 basis points since the beginning of 2022, holders of adjustable-rate mortgages have faced increased monthly payments.

Mortgage broker and expert, Leah Zlatkin, says she’s also heard from more clients over the past week who are concerned that their variable-rate mortgages may soon become unmanageable as the Bank of Canada has increased rates to come. indicated an increase.

“We’ve seen several rate hikes in a row now and it’s a little unbelievable right now,” she tells Granthshala News. “So many customers are wondering, where is the point where I pull the trigger and I move through my variable rate at a certain rate?”

Variable-rate mortgages exploded in popularity during the COVID-19 pandemic as rock-bottom central bank rates made borrowing cheaper and housing more accessible.

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But as interest rates rise through 2022, Tran says the “spread” between variable and fixed rates has narrowed significantly.

He gives the example of a customer who recently came to him to inquire about switching: He has a variable rate that ranges from the prime rate (5.45 percent at most lenders) to minus 1.35 percent, or as much as 4.1 percent today. Is. Tran himself notes that this is a “great rate”.

At the same time, he says that his client has a chance of locking in the fixed rate of 4.69 percent for five years. The “spread” for him is currently 0.59 percentage points.

Some large bank economists in Canada are expecting a central bank rate hike cycle, which will push the benchmark interest rate to four percent by the end of the year, another 75 basis points.

Tran says his client is now deciding whether to “hedge their risks” by locking in a slightly higher rate today, in the hope that the bank will raise rates higher than the current spread.

“It is very difficult to time the market. No one knows what the future rates will be. We do not know whether we are peaking for fixed or variable rates,” notes Tran.

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“Will they go up another 50 points, maybe 75 points? We don’t know. But that’s something he’s asking himself, is it worth locking in right now just for that long-term security?”

Zlatkin notes that the spread calculation is slightly different for each client. While five-year fixed rates are offered today on mortgages with an 80 percent loan-to-value ratio of about 4.7 percent, she says she also sees rates as high as 5.39 percent.

Variable rates currently float between prime rate minus 0.6 percent and prime minus 1.2 percent, she says.

While each client’s financial situation is different, Zlatkin says that for a homeowner paying a rate of 4.6 percent or higher on a variable mortgage, “it may be time to start thinking about a fixed mortgage.” Is.”

The difference and predictability of monthly payments aren’t the only factors to consider when thinking about converting a variable-rate to a fixed mortgage.

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Tran says homeowners should consider whether, in the next one to five years, they anticipate major life developments that could lead to a mortgage change; Having kids and getting a bigger house, moving cities, or refinancing for a major renovation are all common examples.

If you think you might need to break down a mortgage for whatever reason, sticking with a variable rate gives homeowners more flexibility than a fixed rate mortgage because of the amount usually associated with breaking the latter. Due to severe punishment.

Variable rate mortgages all come with a penalty equal to three months’ interest, while their fixed counterparts may have higher fees associated with the difference between the contract rate and today’s interest rates.

“If you have any plans to break the mortgage early because you want to sell and move to another home or refinance or whatever the case may be… there will definitely be some risk in locking up. You will face some hefty penalties. Might have to,” Tran says.

While it’s common to worry about the pain of higher interest rates during an upward swing, Zlatkin says it’s also important to remember that rates rise and fall in cycles and that lower rates will return.

Locking in may provide peace of mind today, but the fear of missing out when inflation comes back under control and the Bank of Canada finally lowers rates can lead to fear of missing out.

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“Once you lock into that five-year fixed rate, it’s incredibly hard to get out of it,” Zlatkin says. “There’s always that buyer’s remorse when you see other people getting a lower rate.”

Experts say a five-year fixed-rate mortgage has traditionally been the most popular option for Canadians, but there are other ways to relieve the pressure of rising rates.

Zlatkin says you can look at different financing options such as…


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