With all this talk about rising rates, is now the time to lock in?

There is much talk these days of rising interest rates. Tomorrow morning, the BoC is expected to announce a rate hike to the Bank of Canada Prime Rate.

Before jumping into our overall recommendation on what to do, let’s point out something important, but overlooked: context. Much of the talk these days about rising rates does not give us enough context surrounding the issue. Context such as, is it the variable or fixed rates that are going up? When rates go up, how long do they usually stay high for?

So, here is some important context:

Fixed rates and variable rates move independently of each other.

The BoC announcement tomorrow will affect the Prime rate, which determines the variable rate. Fixed rates are generally determined by bond yields, and will not be affected by the announcement tomorrow.

The variable rate spread that a lender offers determines your final rate.

When you are negotiating your variable rate mortgage, you are negotiating the spread that the lender will offer. The larger the spread, the better the rate you’ll get. Spreads right now are still pretty good, but have decreased since their maximums in the summer and early fall.

Ok, now that we have those important points out of the way, let’s talk about our recommendation, which is to stay variable, and don’t lock in!

Why? Four main reasons:

1. In my opinion, fixed rates have already peaked, or are nearing their peak. If you fix right now, it’s sort of like buying a stock when it’s most expensive. Even worse, you’ll be stuck with that high rate for 5 years.

2. Fixed rates will only stay this high for a short period of time, maybe a year or year and a half, then they will come back down. Our recommendation is to take variable rates, wait for fixed rates to drop back down (which they will, they always do), and then lock in.

3. Even though the variable rate is going up, the spread between the variable rates and fixed rates are so large, that the savings on the variable rate far outweigh the risk. For example, our lowest variable rate offering is at 1.45% right now, while our lowest fixed offering is around 3.50% (these rates are on high ratio purchases only).

The fixed rate is more than double the variable rate, for all types of transactions. For your variable rate to even reach the fixed rate that you’d lock in at, the variable rate will have to go up 8 times in .25% increments. That is a lot of rate hikes! My best guess is that rates will go up by 1% or so, then peak around there.

For our current rate offerings, check out our rates here.

4. Finally, if you lock in with one of the 5 big banks, the penalty to payout the mortgage will be massive. We’re talking 20,000, 30,000 even 40,000 to payout a fixed rate mortgage. No one thinks they are going to need to payout their mortgage early, but things happen. You might sell and upgrade, you might need to refinance. And most of all, what happens when fixed rates drop? If you want to get a cheaper mortgage in the future, you’ll have to pay the bank a huge penalty to get out the fixed rate that you locked in at.

At Olympic Mortgage we strive to answer all of your questions in a timely manner, and ensure that our clients are well informed about their options.  If you have any questions about your current mortgage or future financing, please don’t hesitate to reach out.

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