Should You Lock In or Not?

That depends. Over the past 7 years, there were many indications that variable rates will go up and many pressures on those with variable rates to lock in. Looking backwards, locking into a fixed term during all those years (with exception of the last couple of months) would have proven wrong. But now that we’ve seen two quick hikes, one wonders what to do. Let’s analyze it.

The truth is, nobody has a crystal ball to predict what will happen with the economy in the upcoming months and years. If economy continues to show signs of strength and growth, it will put pressure on inflation and on Bank of Canada to further raise rates. But if these two rate increases significantly slow down the real estate market and adjacent industries, we will likely see the reason (and pressure) to keep the rates intact.

Since we, the common folks, cannot control the economy nor make predictions on matters on which even economists disagree, let’s take a look at the practical side of things.

If you lock into a 5 year fixed rate now, you will probably get a rate that is at least 0.5%, if not 0.75% higher than what you currently have with your variable mortgage. This means that the variable rate will have to increase another 1% to 1.5% before your maturity date (half of which to reach your “new” fixed rate and half to exceed it) before you start losing money by staying with your variable rate versus fixed.

So, my advice is to stick with your original, long-term strategy that made you select a variable rate, whatever that strategy was. Perhaps it was focusing on payments versus rate, perhaps it was to guarantee an inexpensive penalty should you need to break your contract prior to maturity, etc.

But if it’s going to keep you awake at night, let’s talk about your conversion options.