Should You Lock In?
Probably not, but it also depends on what keeps you up at night…
It’s pretty safe to assume variable rates are going up!! Probably as soon as mid-2022, if not earlier. We still don’t know how many rate hikes we will see as the economists themselves disagree whether the inflation is a long-term issue or a transitory one caused by supply chain issues and other pandemic factors…
That said, if you are in a variable mortgage, should you lock it in or not?
If you are in a variable product, your rate should be in the neighborhood of 1.5%. Current fixed rates, after recent increases, are sitting at close to 3%, perhaps a bit lower.
For you to start losing money for being in a variable versus fixed, the Prime would have to increase by 3% over the next 5 years!!! 1.5% to reach today’s fixed rate and another 1.5% to exceed it so that your average variable rate is 3%. Will this happen? We don’t know but it seems quite aggressive…
On another hand, if future rate increases keep you up at night, perhaps you should consider locking your rate in. Fixed rates are still historically low and having peace of mind over the next 5 years might just be worth the higher rate.
If you decide to lock in though, be careful since, in the future, the cost of breaking a fixed term mortgage could result in high penalties, while a variable term typically guarantees a penalty equivalent to 3 months worth of interest. Again, it all depends on what your plans are and what your strategy is and whether you will stay in your mortgage to the end of your term.
If your mortgage is up for a renewal, or you are buying a new place and don’t know whether to go fixed or variable, you can always get a matrix-type Home Equity Line of Credit and split your mortgage between fixed and variable rates as this product
allows you several mortgages inside its umbrella. And get the best of both worlds.
Preparing for higher rates doesn’t necessarily mean that you have to lock your variable rate in. If your original strategy was to focus on payment versus the rate, you can prepare for higher rates by increasing your payment amount so you are paying down more principal and building a buffer for later.
Remember, nobody has a crystal ball that can predict the future and tell you where the rates are heading. We have seen several examples of this over the past decade or so. Anyone who tells you that you should go fixed or variable has a 50% chance of being right or wrong.
But being in a variable rate today doesn’t look bad. And if you don’t want to put all of your eggs in one basket, you can always hedge your bets with a Home Equity Line of Credit and include a fixed and variable component.
Photo by Markus Spiske on Unsplash