At this time Bank of Canada raise rates only slithly at its recent meeting of January, it is clear that interest rates are on their way up.
It is understandable that those with variable-rate mortgages are on edge now despite the fact they may still be better off with a fixed rate, despite several Bank of Canada rate increases. However, I understand that nobody wants to pay more interest.
Therefore, how can those with variable-rate mortgages mitigate the impact of the upcoming rate hikes? Several options are available.
1. Embrace the wave.
In the long run, variable-rate mortgages have historically been better than fixed-rate mortgages. However, there are some instances where this may not be the case. In the Bank of Canada’s last hike cycles, interest rates have been raised by an average of 144 basis points, if the past is a guide to the future. By the end of this year, the Bank of Canada is expected to hike rates five times, or 125 basis points. The average big-bank forecast predicts that by the end of 2023, overnight rates will be 1.75 percent, so roughly 150 basis points higher than they are now. Having a spread of 150 basis points between fixed and variable rates (averaging high-ratio and conventional rates), the chance of you breaking even is relatively high.
2. Commit to a fixed rate.
Locking into a fixed rate before even variable rates start to rise may be more appealing to those who value a restful night of sleep. The good news is that no one can predict interest rate movements perfectly, and fixed rates have also been rising steadily over the past year. Your expected savings may be eroded if you have to pay a premium for switching to a “safer” fixed rate. In addition, you should discuss your individual situation with me first, since locking in a fixed rate if you expect to sell or refinance in the future could result in a higher prepayment penalty than if you decided to stay with your variable rate.
3. Hedges can be created by using prepayments.
In order to mitigate rising interest costs, you can pay down your mortgage sooner if you’re willing to ‘ride the wave’ and stick with a variable interest rate through whatever rate hikes may come. In the case of prepayments, you make additional payments over and above your scheduled mortgage payments, which are directly applied to your principal balance. If you prefer, you can pay a higher fixed rate mortgage and accelerate your principal repayments. In addition, you must keep in mind how much your lender allows you to prepay per year, which is typically 10% to 20% of your mortgage balance. You can hedge rising rates very effectively by making the most of these prepayment privileges, as you’ll reduce your interest-cost, possibly more than any rate increase.
Whatever is your situation, it is more than ever, time to call the experts. You home is the biggest investment of your life and also the biggest obligation as well. There are many components to a mortgage, not only the rate, but the product. All influenced by your credit, the location of the property, your beacon score, your repayment history and so on.
Call us at 403-253-2022 or visit online to sign up for our free confidential consultation to take the guessing out of your mortgage.