Is it time to lock-in your variable mortgage rate?

Amid soaring inflation, the Bank of Canada has hinted that the first interest rate hike could take place as soon as the April-to-June quarter of 2022. Analysts had previously expected rates to begin rising from record lows in the second half of 2022.

You may be wondering if you should lock-in your variable rate mortgage now. There is lots of chatter in the media about the rate increasing again over the next year—up to another four times, so you may have some concerns.

The first question you should ask yourself is why you chose a variable rate mortgage in the first place.

Was it because it had a lower rate than a fixed term mortgage or did you have a plan to take advantage of that lower interest rate?

Historically, a variable rate has been a better option by just comparing rates but those rates can change. Potentially and depending on whether you have a variable rate mortgage or an adjustable rate mortgage, more of your payment will be going toward interest rather than principal if your payment isn’t adjusting accordingly as rates increase.

Another important consideration with variable rate mortgages is that they have lower prepayment penalties generally than a fixed rate mortgage should you decide to break your mortgage early. Statistics support that this happens more often than not.

Instead of trying to guess where rates are headed, consumers would do better to think about their own situation. They should evaluate their personal balance sheets and risk tolerance. The decision of whether to go short (variable) or long (fixed) will depend on the consumers’ tolerance for risk as well as their ability to withstand increases in mortgage payments.

For some currently in a variable rate mortgage, it could take up to 10 rate increases of 0.25% to not save money with your variable rate mortgage as the rate generally only increase by 0.25% at a time.

You need a plan with a variable rate mortgage. The best thing is to do a review with a mortgage broker to determine your personal tolerance to rate increases and determine a strategy for managing your mortgage to reduce your overall cost of borrowing.

Something to consider about locking in your mortgage is that not all lenders are going to offer you the very best fixed rates. You are also hedging your bet that at some point your fixed rate is going to be lower than a variable rate mortgage.

No one can predict where rates are headed. Even the experts get it wrong. Your decision to lock-in to a fixed rate mortgage should not be based on what you read in the media.

If you are at your maximum purchasing power or you’re a worrywart, lock-in, forget about it, and enjoy life.

If you would like a no obligation review and financial analysis for your personal situation please let me know. We can compare your current variable rate mortgage to a fixed term option and even compare it to another variable rate mortgage that might have a deeper discount.

That way you can make an informed decision as to whether locking in is the best option for you.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.