With interest rates poised to rise at any time, should I lock my variable rate mortgage in now? Or should I wait until summer when the rates start to climb to lock in my mortgage rate?
To answer this question correctly you have to understand that the variable rate mortgages and the fixed rate mortgages are based on two different rates. Variable rate mortgages are based on the short term rates which are tied directly to the Bank of Canada prime rate while fixed rate mortgages are linked to the bond markets.
The importance of these distinctions help to explain why they don’t necessarily both change at the same time. While nothing will change on your variable rate until the actual announcement of a rate increase, the bond market deals with future events occurring and usually occurs weeks if not months prior to an actual increase in the prime rate.
Translated, this means that while variable rates are likely to move upwards by a quarter point or quite possibly even more as early as April, but most likely in June or July, fixed rates could jump upwards by the same amount or likely more at any time on speculation of these potential rate increases. Of course, if the rates jump prior to the next Prime Rate announcement and Prime doesn’t change, it will slowly lower itself a bit to get back in line, at least until the next round of speculation as to the next upcoming rate announcement.
The important consideration for you is that fixed rates could jump as little as two weeks prior to Prime Rate changes or as much as two months prior. It all depends on what the people in the bond market decide.
So what does this mean for you currently? If it is crucial for you to be sure you get the lowest fixed rate mortgage possible, now may be the best time for you to lock your variable rate mortgage in. On the other hand, if you have a variable interest rate that is at prime or at prime minus a slight percentage and you only have a couple years left on your mortgage you might be better off riding the course.
Whiles rates are definitely going up, no one knows for sure how much the increase will be, and if your variable interest rate mortgage is currently sitting at a rate with a discount off prime, rates will have to increase substantially for your variable rate to be higher than the fixed rate currently. If you locked in now, you could cost yourself thousands of dollars of interest over the next year or two.
The other option if you are in the first few years of a 25 or 35 year variable rate mortgage, is to consider not only locking in, but actually extending it as well. This may involve some mortgage payout penalties and additional refinancing costs, but could ease your sleeping pattern if you have become concerned rates may sky rocket over the next several years. The trick with this is to determine whether the payout penalty would be offset enough by the savings of going with a fixed rate mortgage.
There is no right or wrong answer when it comes to locking in your variable rate mortgage as each situation, mortgage amortization period and stage in your individual mortgage differs from individual to individual. Plus the most important variable of all, the Prime Rate, is a moving target. It is going to come down to your comfort level, your ability to afford potentially higher rates in the future and what will keep your happy. For some this will be simply a matter of locking the rate in now and being content, for others it may involve just going with the flow for now. To help keep everything in perspective, we need to remember we currently have some of the lowest rates ever and there is only one direction for them to go, and it’s up, but even if they were to double, they will still be very attractive if we compare them to rates during the 80’s! So don’t get caught up in the fear, make sure you can afford the higher rates in the future, but if you can lock in at the lower rates currently and it doesn’t cost you it might be a wise decision.
