Over the past few days, I've received many inquiries in my inbox with questions from clients asking what they should do about the real threat of interest rates rising that they are hearing in the media.
This question has many different answers, and all can be relevant (or not) to your specific situation. Some people are maturing in 6 months, others not for 4 years. Some have a very good grasp on why rates fluctuate and have a risk tolerance for it, while others do not, but what I want to do is at least arm you with some good information. When the media reports on rising rates, it tends to turn into water cooler conversation.
The first thing you should know : Variable rate and fixed rate mortgage rates are not intrinsically linked together as many believe. The variable is set by the Bank of Canada using the prime rate and is under zero pressure to increase at this time. Fixed rates however, are very much tied to the US bond market, so they are far more volatile as anything can spook them (like a Trump presidency) which can send them moving upward based on what they "think" might happen, but it's very much speculation based.
With all this said, interest rates always tend to rise a little this time of year regardless, (The banks fiscal year ends on Oct 31st) and tend to decrease again as we get into the spring as it does every year. Make no mistake, the only real wildcard here is Trump, it's all a "wait and see" approach what he does because nobody can accurately predict if he's going to upend the entire system or go with the more predictable status quo.
That said, if you wanted to switch over to a fixed term that is less than 2 years and have no plans to sell or refinance, you really can't make a bad decision when rates are this low.
However, the one Caveat I will tell you to consider (and PLEASE mention this to anyone within earshot if you're having a conversation about mortgages), is when you decide to lock ANY chartered banks fixed rate term, it will have RIDICULOUS penalties attached to it, should you try to terminate or refinance before the term is up. This is why banks WANT to sell you a fixed rate product from the start, because statistically, there is more than an 80% chance (nationally) that you will end up either refinancing or moving house before the end of your term. This is when the banks IRD* penalty kicks in and what seemed like a good idea at the time, turns out to be a $10,000+ mistake.
There are many lenders that as a Mortgage Broker I have access to that have penalties that rarely exceed 3 month interest regardless if you're on a fixed or variable because they don't use the same IRD formula for calculating it. Drop me a note at mark@normanlane.ca if you have any specific questions and I'll get you the straight answers you need before you make any decisions that could end up costing you way more than it should.
*IRD penalties are calculated when they claw back any discount that was given from the posted rate - ie, the current posted rate is 4.64%, but lets assume the current discounted rate would be 2.50%, - this means a discount of 2.14% is being provided to you. Here's where it gets interesting: when you terminate, sell or refinance, prior to the end of the term, chartered banks calculate the penalty based on clawing back any discount they provided you up front and apply the (higher) posted rate for however many months are left on the term. It's a kick in the face that homeowners rarely see coming until it's too late.
Mark
