Should I Stay Variable Or Lock In?

General Carola Singer 12 Sep

Yes there have been two increases to Prime by Bank of Canada this Summer. The question a lot of people have is whether to lock in or stay in a variable mortgage rate.

Here are some considerations:

  • If your discount from Prime (now 3.20%) is 0.50% or deeper – then the variable rate product remains a great place to be.
  • If your discount from Prime is 0.25% or less then depending on which lender you are with you may consider locking into a fixed rate, BUT (yes it’s a big BUT):
  • The penalty to prepay (example: refinance or sale of property) a variable is typically 3 months interest which is about 0.50% of the mortgage balance. Whereas the penalty for a 4yr/5yr or longer fixed rate mortgage the mortgage penalty can be almost 4.5% of the mortgage balance depending which lender you are with and what term you are in. So switching from a variable to a fixed could be costly in the long run if you need to break that mortgage down the road. CHOOSE WISELY!
  • Before locking in there are many questions to ask, most the lenders will not ask you. Since your lender is re-active, you need to be pro-active. That could mean not to take action at all.
  • The benefit to lock in is mostly the lender’s not yours. Once you lock in they have much more of a ransom (penalty) on you.

We had two recent rate increases. Wouldn’t it mean there will be more on the way? 

Not necessarily.

Depending if the government had overstepped with the rate hikes there could be a pullback within the next 6 to 12 months. In 2010 rates increased 0.25% three times and then didn’t move up further for 5 years, after which it was decreased twice by 0.25%.

So last time Prime was pushed to todays level it remained there for 5 years before it was cut.

Food for thought.

The next Bank of Canada meeting is October 25, 2017. I will be watching and waiting. Remember, BE PROACTIVE!