Is The Prime Rate Increasing, And Should I Lock Into A Fixed Rate?

On March 2nd and April 13th, the Bank of Canada raised its key interest rate by 0.25% and 0.50% respectively. With the next increase expected to occur on June 1st, the biggest question that is coming up is whether or not borrowers with variable-rate mortgages should convert to fixed. Even though fixed rates are still relatively low and are a fantastic solution for many, the answer for most people is still variable. For those who want to see the compelling reasons why the variable rate makes more sense than fixed, keep on reading.

As experts in the field, we at Mortgages By Erin have written down information regarding this age-old debate of whether you should lock into a fixed rate or continue on the variable rate path.

Consider this:

Prior to any of these increases, the monthly payments on a $600,000 mortgage with a twenty-five-year amortization and a variable rate of 1.50% were $2,398.30 per month. With an increase of 0.75%, the interest rate increased to 2.25%, increasing the payments to $2,613.67. This is a difference of $215.37 per month. If you were to lock into a five-year fixed rate of 4.59%, an average rate available in the market today, your monthly mortgage payments would be $3,350.92. That’s a difference of $737.25 per month or $8,847 per year!

In addition to the higher payment, you’d be changing the flexibility of your mortgage. If you ever wish to break your mortgage part way through the term with variable rates, the penalty would be based on three months of interest. In contrast, penalties for breaking fixed-rate mortgages are based on the greater of either three months of interest or the interest rate differential calculation. The Bank of Canada makes eight rate announcements per year, with 5 left to go in 2022, and would have to raise its key interest rate upwards of nine times (of 0.25% increase) before your rate matched current fixed rates.

Takeaway:

Banks and lenders love fixed-rate mortgages and are hoping to see borrowers convert. Historically, Variable Rate Mortgage holders have always out-performed fixed rates. Now is not the time to panic, but rather the time to be taking advantage of this low-rate environment. Be proactive. Set aside that $738 in savings per month into a savings account if you are concerned about future rate increases. You can also use your prepayment privileges to make extra payments to pay down your mortgage faster.

If you are looking for a mortgage broker in Toronto, ON, reach out to us at Mortgages By Erin. With over ten years of experience, mortgage broker Erin and her team have successfully helped hundreds of people realize their dream of homeownership. Our passion for helping others is the driving force behind our business and the way we operate it. As experienced mortgage brokers, we also help clients with other mortgage products. We understand how important and serious a mortgage investment is. With this in mind, we take the time to explain the ins and outs of the process, the risks, and the benefits, as well as share our advice on the multitude of products available to consumers.

We offer services like mortgage pre-approvals, home purchase mortgage, second mortgages, mortgage refinances, purchase/refinance plus improvement mortgage, home equity lines of credit, mortgage renewal/transfer, self-employed mortgage, credit counselling for bruised credit, alternate and private mortgage lending, spousal buyout mortgage, permanent and temporary residents. We offer our services to clients across Ontario, including the following areas North York, Scarborough, Etobicoke, Toronto, Mississauga, Markham, Vaughan, and Richmond Hill, ON.

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