As rates rise, is it time to lock in a fixed rate mortgage? Here’s what you need to know – National

According to experts who spoke to Global News, the Bank of Canada’s interest rate hike has some variable rate mortgage holders thinking about the benefit of locking in a fixed rate.

But the peace of mind that comes with a steady rate comes with trade-offs owners should be aware of before opting to convert, they warn.

Victor Tran, mortgage and real estate expert at, says he’s seen an “increase” in customers inquiring about the freeze on fixed-rate mortgages since the Bank of Canada raised its key rate to 3.25. % on September 7, an increase of 75 basis points.

“I think this most recent hike has definitely made more Canadians worried about their finances,” he says.

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Variable-rate mortgages with adjustable payments see monthly mortgage costs rise in line with central bank rate hikes, while homeowners with fixed mortgages only feel the pain of higher interest rates when from renewal to the end of their term.

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

Leah Zlatkin, mortgage broker and expert, says she’s also heard from more clients over the past week who are concerned that their variable-rate mortgages will soon become unmanageable, as the Bank of Canada announced to further rate hikes to come.

“We’ve now seen several rate hikes in a row and it’s kind of relentless right now,” she told Global News. “So many clients wonder where is the moment when I pull the trigger and go from my variable rate to a fixed rate?”

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What is the difference between the variable and the fixed?

Variable-rate mortgages have exploded in popularity during the COVID-19 pandemic as lower central bank rates have made borrowing cheap and housing more accessible.

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But as interest rates have climbed through 2022, Tran says the “gap” between variable and fixed rates has narrowed significantly.

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

At the same time, he says his client has the ability to lock in a five-year fixed rate of 4.69%. The “spread” for him is therefore currently 0.59 percentage points.

Some economists at major banks in Canada expect the central bank’s rate hike cycle to lift the benchmark interest rate to 4% by the end of the year, an additional 75 basis points. .

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Tran says his client is now deciding to “hedge his risk” by locking in the slightly higher rate today in hopes the bank will raise rates above the current spread.

“It is very difficult to time the market. Nobody knows what the future rates will be. We don’t know if we’re at the top for fixed or variable rates,” Tran notes.

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“Are they going to go up another 50 points, maybe 75 points? We do not know. But it’s something he wonders, is it worth locking up now just for that long-term protection?”

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Zlatkin notes that the spread calculation is a bit different for each client. While five-year fixed rates are often offered today around 4.7% with an 80% loan-to-value ratio on the mortgage, she says she also sees rates as high as 5.39% .

Variable rates currently fluctuate between prime minus 0.6% and prime minus 1.2%, she says.

While every client’s financial situation is different, Zlatkin says that for a homeowner with a variable mortgage paying a rate of 4.6% or more, “it might be time to start thinking about a fixed mortgage.” .

Does conversion correspond to your life projects?

The difference and predictability of monthly payments are not the only factors to consider when converting from an adjustable rate mortgage to a fixed mortgage.

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Tran says homeowners should ask themselves if, over the next five years, they anticipate any major life developments that could lead to a change in mortgage; having children and buying a bigger house, moving or refinancing a major renovation are common examples.

If you feel you might need to break a mortgage for any reason, the variable rate gives homeowners much more flexibility than a fixed rate mortgage due to the generally stiffer penalties associated with breaking the latter.

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Variable rate mortgages all come with a penalty equal to three months interest, while their fixed counterparts may have higher fees related to the differential between the contract rate and current interest rates.

“If you’re planning on breaking the mortgage early because you’re looking to sell and move into another house or refinance or whatever… there’s definitely going to be a risk in locking yourself in. You might face heavy penalties,” Tran said.

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.

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The foreclosure could bring peace of mind today, but could raise concerns that it will miss out when inflation is back under control and the Bank of Canada eventually cuts rates.

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“Once you lock in that five-year fixed rate, it’s incredibly difficult to get out of it,” Zlatkin says. “There’s always that buyer’s remorse when you see other people getting lower rates.”

Find predictability without getting locked in

While five-year fixed-rate mortgages have traditionally been the most popular option for Canadians, there are other ways to ease the pressure of rising rates, experts say.

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

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For those who choose to lock in a fixed rate, a term of one, two or even three years could allow you to “weather the storm” and find a mortgage that better suits your financial situation once the current upward cycle completed rates. finished, she adds.

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Tran says that for variable rate homeowners who are considering locking in a slightly higher fixed rate today, one option could be to make accelerated payments on your mortgage as if you were already paying that higher rate.

In other words, pay your variable rate as you have already converted it to a fixed rate.

Mortgage prepayments always go straight to principal, not interest, Tran notes. And in this scenario, if rates rise to the point where you’d be paying as much on your variable rate as if you had converted it to a fixed rate, you’re already budgeting the larger amount while still maintaining the flexibility of the variable mortgage.

“Then, if that prime rate goes up again, it will have virtually no impact on you because you paid a higher amount to begin with. So it’s just a way to mitigate the risk a bit,” he says.

Whether holders of variable rate mortgages move to a fixed rate or change their finances to provide more predictability in another way, Tran says he expects the traditional popularity of variable rate mortgages to fixed rate persists, for owners preparing to renew and buyers entering the market today.

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

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