What about this recent Bank of Canada Interest Rate Increase?
If your discount from Prime -which is now now 3.20%- is 0.50% or deeper – then the variable rate product remains a really 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 converting to a fixed rate, BUT…there is something to consider and you would do yourself a great service, in this broker’s opinion anyway, to spend some time pondering this.
Keep in mind the penalty to prepay in the event you refinance or also the sale of property- for a variable e\rate mortgage early is ~0.50% of the mortgage balance, whereas if in a (4yr/5yr or longer) fixed rate mortgage the penalty can be closer to 5% of the mortgage balance ***depending upon which specific lender you are with and how long of a term you lock in for. Note, I’ve recently heard scenarios where the penalty to break a mortgage was as high as 11% of the mortgage balance, the 5% is an average figure.
If your Variable rate mortgage is with TD or WSCU (Westminster Savings Credit Union) your payments have not increased, as their variable rate product offers a static payment. (You do have the option to increase your payment if you like).
So with these two lenders you could be inflicting a significant payment increase on yourself to lock in, as much as $52.00 per month per $100,000 in outstanding balance.
There are many considerations before jumping to lock in, many questions to ask, most of which the lenders are unlikely to ask you. Your lender is re-active, not pro-active – you need to be pro-active. And sometimes being pro-active results in no action being taken at all.
It is usually in the lenders greater benefit that you lock into a fixed rate, rarely is it to your own benefit. There is documented evidence over years and years that support this.
At the moment many decisions are being made from a biased frame of mind; i.e. because we have had two recent rate increases this must mean still more rate hikes are on the way.
The government may well have overstepped with this recent rate hike and there may be a pullback within the next 6 to 12 months.
Back in 2010 rates increased 0.25% three times, and then sat stagnant for nearly five full years before two 0.25% decreases back downward.
In other words the last time Prime was pushed as high as it stands today, it sat there for five full years. And was then cut.
Something to think about.
The next Bank of Canada meeting is October 25, 2017.
I will be watching and waiting.
If you have any questions or comments, feel free to reach out at firstname.lastname@example.org or call me at 778 233 2377