Variable Mortgage Rates are Rising – Is it Time to Lock-In?

The Bank of Canada (BoC) has raised interest rates four times since July of 2017, with BoC Governor Stephen Poloz warning that more raises are coming. Indeed, the Benchmark Rate currently sits at 1.75 percent, up from .5 percent in the Summer of 2017.

The BoC has indicated that it would like to see rates return to ‘normal’ – between 2.5 to 3.5 percent.

Will Mortgage Rates Continue to Rise?

Before getting into a discussion of what the rise in rates will mean for your Monthly Mortgage Payments let me first offer a caveat about whether or not the rate increases are likely to continue.

Mortgage Rates are on the rise as Canada and the United States have come to an agreement on NAFTA, signing the USMCA (United States Mexico Canada Agreement) – It doesn’t have the same ring to it does it?

While the Agreement has been signed, it still has to be ratified by the U.S. House of Representatives, now controlled by the Democratic Party.

The Democrats have already signaled that there is significant opposition to the deal, as they would like more labor and environment protections included. This does put its passage in jeopardy.

Further, given that U.S. President Donald Trump is likely to face increasing domestic woes, if history is any lesson, he is likely to set his sights abroad, trying to accomplish what he can internationally. Again, if history shows us anything, President Trump interacting with Canada is not, in general, a sign of good things to come for us.

The changing political landscape of the U.S. and its effect on Canada is a discussion for another time, but lets just remember that the Free Trade Agreement with the U.S., in the short term, is anything but settled.

For the sake of argument, lets hold that the U.S. will pass the USMCA and everything is settled. The economy will continue to hum and the Bank of Canada will continue to raise rates to stave off inflation.

So What Does This Mean for your Mortgage? (You can Skip all of the math and go directly to the “So Does it Make Sense to Lock In?” Section below).

Lets take a Hypothetical Scenario.

Mortgage Lenders set their own Prime Rates, which move up or down in tandem with the Bank of Canada’s Benchmark Rate. One month ago the going Prime Rate was 3.7 (except for TD which sets its Prime Rate higher, allowing it to offer seemingly better discounts, which are not really discounts relative to other lenders).

Following the Bank of Canada’s increase in its Benchmark Rate by .25 percent most lenders raised their Prime Rate another .25 percent, putting their Prime Rate at 3.95.

So What Does this Mean for Your Monthly Mortgage Payment?

Lets take a typical Mortgage in London for $300,000. One month ago, at Prime Minus 1.2 Percent (the best variable rate mortgage available at the time), the monthly mortgage payment was 1,345.85.

With the increase of .25 percent the monthly mortgage payment would be 1,383.93 – an increase of about fifty dollars.

While the fifty dollar increase does not seem like much, lets take a look at what the payment would be should the Bank of Canada incrementally raise rates up to what it considers ‘normal’ – or a 3 percent benchmark rate.

Should the Benchmark Rate rise another 1.25 percent – to 3 percent that same mortgage $300,000 mortgage will now have a payment of $1,583.

So Does it Make Sense to Lock In Your Mortgage?

Lets take a look at a 5 Year Fixed Rate Mortgage.

The Best Five Year Fixed Mortgage Rate now sits at 3.34 (insured). That same $300,000 dollar mortgage would carry a Monthly Mortgage Payment of $1,476.25, up from 1,345.85 a month prior.

While a month ago the Monthly Mortgage Payment was 1,345.85 at a Variable Rate, a 5 Year Fixed Rate will be nearly $150 dollars more, but leave you with the certainty of knowing your payments will not rise in the next five years. Alternatively, the Mortgage Payments could continue to rise, up to $1,583 (if not more) if the Bank of Canada’s predictions come true.

Mortgage Payment Security

While the nearly $150 dollar rise in Monthly Mortgage Payment is obviously substantial, it is still less than the $250 dollar rise in Payments that could occur should the BoC continue to raise its Benchmark Rate.

As with any Variable Rate Mortgage there is a choice between long-term security and short term financial gain.

So Do I Lock-In?

When I was young I was taught that the first payment you make is your home, and then your food, and then your hydro – you can live without everything else thereafter.

If your finances can handle the extra $250 Monthly Mortgage Payment then it might be worth it for you to ride the wave and see what happens with the U.S. and Canada’s Interest Rates thereafter.

However, if you are already feeling the pinch of rising rates then it might be worth the security of a 5 year fixed, protecting yourself from future economic shocks. As I was once taught, “You’d be surprised at how quickly you can become homeless if your bills aren’t paid.”

So What Do I Do Now?

The best course of action (and here is the plug for my services) is to meet with a Mortgage Professional to go over your options. We can discuss your current rate, potential switches and the various options that will work the best for your long-term financial planning. Please do feel free to contact me, Mark Mitchell – London’s Mortgage Agent, Call or Text, at 519-860-2102.

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