This seems to be one of the most frequently searched topics on my blog currently and there are no easy answers for this as every person’s situation and mortgage is different. Although there are some suggestions I have that may help to point you in the right direction and allow you to make a more informed decision.
Most of the concern for people currently is the rising mortgage rates on fixed term mortgages. People tend to be afraid they will miss out on a great deal and would prefer to lock in now, giving up some incredibly low variable rates for a guaranteed fixed rate. Perhaps some of it has to do with uncertainty, but most of it has to do with lack of understanding of their options and where rates will go.
Variable rate mortgages, prior to fall of 2008, were available for prime minus as much as .9%. So when prime was at 4.75% people were paying interest rates of only 3.85%. Compare this to a fixed rate in the fall which ranged from 5.35% to 5.7% and people were saving considerably. The variable rate was a great way to go then and looks even better now if you still have a variable rate mortgage from that time frame or earlier, as you could be paying as little as 1.35% interest now compared to a fixed rate of 3.5% to 4%.
Fixed rate mortgages are based on bond yields which can vary daily as they are traded in the open market. Usually they are a few percent higher than the current bank prime rates, but in times of uncertainty or with pending inflation, they can start to rise at a pace much faster than the Bank of Canada. This is partly what has caused fixed rate mortgages to rise currently.
Now over the next year the Bank of Canada has already announced there won’t be any changes to the prime rate. So if you have a variable rate than is prime minus, it will stay where it is most likely for a year or longer. Fixed rates will most likely rise a bit by next summer, but most forecasts are currently calling for the increases to only be a percent, possibly two on the high side.
This would increase a five year fixed rate to almost six percent, which is still incredibly low historically. This is where the difficult decision comes in for many. If you currently own a variable rate mortgage that is prime minus, locking in will cost you a hundred dollars a month per $100,000 of mortgage in increased payments. You might be better off maintaining the current variable rate and increasing your monthly payment each month and applying the additional to your mortgage principal. If your goal is to pay the mortgage off as quickly as possible this is the most efficient method.
If however you are more concerned with your payments getting out of control, you have entirely different motivations. It may help you to sleep better for the next five years to refinance your current mortgage to a five year (or longer) fixed rate mortgage as these types of rates are unlikely to get much lower. Just be aware whenever you terminate a mortgage and renew, you will be hit up with mortgage payout penalties, although this can be negotiated away if you keep the mortgage with the same bank.
If your variable rate mortgage is currently a prime plus type of mortgage, now indeed may be a great time to lock in a fixed rate at only a little bit higher than your variable rate and know you will be safe for the next few years. Everyone has a slightly different circumstance and with the variables you always have to be aware of are how much you can afford, especially if rates increase, how long your current term has before you have to renew, and what your current interest rate is. So take a close look at this when making your decision as it can make these decisions easier.
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Bill,
My two cents… The B of Canada “says” they won’t raise prime until June 2010. I have a variable mortgage, and I would love to see that happen, but I’m not 100% convinced it will. If inflation starts to kick in (and it will), they are going to have to raise interest rates. The Bank (and nobody else for that matter) can’t accurate predict what’s going to happen in 6-12 months.
That being said, I’m hoping they do and I am not giving up my Prime less 0.85.
As you are aware it’s pretty complicated, but the part we need to remember is that if the Bank of Canada does raise interest rates it stifles the economy, now if the economy takes off like a rocket in the next six to twelve months that is an entirely different scenario.
If it does take off we get the bonus of more money flowing into the economy in general, more oil projects will take off due to increased energy demands and it all helps propel everything from wages to housing to energy prices creating inflation. Tie this in with all the money the governments have started printing and this could cause even further inflation. This will be an even worse issue in the US as they printed money like crazy which is part of the issue with the US dollar being devaluated.
So overall inflation will start coming into effect, but probably not for another year, possibly longer, so much like you I am hanging onto all my prime minus variables too!!!