With interest rates on the rise, is it now time to secure a stable mortgage? Here’s what you need to know – Watani

The rise of the Bank of Canada interest rates We have some Variable Mortgage Owners think of the positive side to lock a fixed exchange rateAccording to experts who spoke to Global News.

But they caution that the peace of mind that comes with a flat rate has trade-offs that homeowners should be aware of before they choose to shift.

Victor Tran, mortgage and real estate expert at rate.ca, says he’s seen a “rise” in clients inquiring about fixed-rate insurance Mortgages Ago Bank of Canada It raised its policy rate to 3.25 percent on September 7. an increase of 75 basis points.

“I think this latest rally has certainly made more Canadians worried about their finances,” he says.

Read more:

How high will the Bank of Canada raise interest rates? Economists watch this metric to see

The story continues below the ad

Variable rate mortgages with adjustable payments see monthly mortgage costs rise in parallel with higher central bank rates, while homeowners with fixed mortgages feel only the pain of higher interest rates when they renew at the end of their terms.

With the Bank of Canada’s policy rate up 300 basis points since the start of 2022, adjustable rate mortgage holders have faced ballooning monthly payments.

Lea Zlatkin, a mortgage broker and lowest rates expert, says she’s also heard from more clients in the past week who were concerned that variable rate mortgages could soon become unmanageable as the Bank of Canada signaled more rate increases to come.

“We have now seen several price hikes in a row and they are continuing a bit at the moment,” Global News said. “Lots of clients are wondering where is the point at which I pull the trigger and go from my variable rate to a fixed rate?”

Click to play the video:

Raising borrowing costs for homeowners and potential buyers

Borrowing costs rise for homeowners and potential buyers – August 18, 2022

What is the “difference” between a variable and a constant?

Variable rate mortgages have exploded in popularity during covid-19 pandemic Extremely low central bank rates made borrowing cheap and housing accessible.

The story continues below the ad

But with interest rates rising through 2022, Tran says the “spread” between floating and fixed rates has narrowed considerably.

He gives the example of one customer who came to him recently to inquire about a transfer: He has a variable rate equal to the prime rate (5.45 percent at most lenders) minus 1.35 percent, or 4.1 percent today. Tran himself notes that this is a “fantastic rate”.

At the same time, he says his client has the opportunity to secure a five-year fixed rate of 4.69 percent. The “difference” for him is currently 0.59 percentage points, then.

Some of Canada’s major bank economists expect the central bank’s rate-raising cycle to raise the benchmark interest rate to four percent by the end of the year, another 75 basis points.

Read more:

Not all Canadians feel the pain of higher interest rates. Here’s why that changed

Tran says his client is now deciding whether to “hedge his risk” by locking in a slightly higher rate today in the expectation that the bank will raise rates higher than the current spread.

“It’s very hard to tell when the market will be. Nobody knows what the future rates will be. We don’t know if we are at the peak of fixed or floating rates,” Tran notes.

The story continues below the ad

“Are they going to raise another 50 points, maybe 75? We don’t know. But it’s something he asks himself, is it worthwhile to lock him up now just for that long-term protection?”

Read more:

Starting point – why some mortgage holders may have to pay more as interest rates rise

Zlatkin notes that the spread is slightly different for each client. While five-year fixed interest rates today often offer around 4.7 percent with a loan-to-value ratio of 80 percent on a mortgage, she says she’s also seeing rates as high as 5.39 percent.

It adds that variable rates are currently floating between an initial rate of minus 0.6 percent and an initial rate of minus 1.2 percent.

While each client’s financial situation varies, Zlatkin says that for a homeowner on a variable mortgage paying a rate of 4.6 percent or more, “it may be time to start thinking about a fixed.”

Does the conversion fit your life plans?

The difference in monthly payments and their predictability isn’t the only factor to consider when converting a variable interest rate into a fixed mortgage.

The story continues below the ad

Tran says homeowners should consider whether to anticipate major life developments that could change their mortgage within the next one to five years; Having children and getting a bigger home, moving cities, or refinancing for a major renovation are all common examples.

If you feel you may need to break the mortgage for any reason, sticking with the variable rate offers homeowners much greater flexibility than a fixed rate mortgage due to the stricter penalties associated with breaking the latter.

Read more:

fishing house? Here’s what you should ask your mortgage broker before making an offer

All variable rate mortgages come with a penalty equal to three months of interest, while their fixed counterparts can charge higher fees associated with the difference between the contract rate and today’s interest rates.

“If you have any plans to break the mortgage early because you’re looking to sell and move into another home or refinance or whatever the case is…there will definitely be some risk of foreclosure. You could face some big penalties,” Tran says.

While it’s common to worry about the pain of higher interest rates during an upward swing, Zlatkin says it’s also important to remember that rates go up and down in cycles and that lower rates will return.

Click to play the video:

Tens of thousands of Canadians may soon reach a mortgage ‘stepping stone’

Tens of Thousands of Canadians May Soon Reach Mortgage ‘Stepping Point’ – August 25, 2022

The shutdown may provide peace of mind today, but it could also bring fear of getting lost when inflation comes back under control and the Bank of Canada eventually cuts interest rates.

The story continues below the ad

“Once you maintain the steady five-year rate, it’s very difficult to break out of it,” Zlatkin says. “There’s always that buyer’s remorse when you see other people getting lower prices.”

Finding predictability without locking

While five-year fixed-rate mortgages are the most popular option for Canadians, there are other ways to relieve the stress of higher interest rates, experts say.

Zlatkin says you can consider different financing options such as changing your mortgage amortization period and paying a fixed monthly amount at a variable rate.

Read more:

Worker? installed? fixed? Choosing the right mortgage with high interest rates

For those who choose to keep a fixed rate, a period of one, two, or even three years can allow you to “walk out the storm” and find a mortgage that better suits your financial situation once the current rate-raising cycle is over, she adds.

The story continues below the ad

Tran says that for variable rate landlords who are considering fixing a fixed rate a little higher today, one option could be to make quick payments on your mortgage as if you were actually paying that higher rate.

In other words, pay your variable rate as if you had already switched to a fixed rate.

Tran notes that advanced mortgage payments always go directly to principal, not interest. And in this scenario, if rates go up to the point where you’ll pay as much of the variable rate as you would if you switched to a fixed rate, you’re actually budgeting for the higher amount while still keeping the variable mortgage flexible.

“Then if the prime rate goes up again, it basically has no effect on you because you’re paying a higher amount initially. So that’s just one way to mitigate a small amount of risk,” he says.

Whether holders of variable rate mortgages are switching to a fixed rate, or changing their finances to provide more predictability in another way, Tran says he expects the traditional popularity of fixed rate mortgages to continue, for both homeowners preparing for renovation and buyers entering the market. today.

“I think a lot of Canadians are just looking for certainty now.”

Click to play the video:

What does a Bank of Canada rate hike mean to you

What does a Bank of Canada rate hike mean for you – September 8, 2022

© 2022 Global News, a division of Corus Entertainment Inc.