There has been a lot of talk in the press about rising interest rates… again. People naturally become alarmed and query whether or not they should secure their variable-rate mortgage. The answer is highly contingent on a number of factors.
The bank’s prime rate is based on the Bank of Canada’s overnight rate. A variable rate is calculated by subtracting your discount from the bank’s prime rate. In other words, if the prime rate goes up and down your variable rate will go up or down.
Bank of Canada Official YouTube Channel
You should make the decision on whether fix your rate based on your tolerance for a payment increase, cash reserves and how well you sleep at night with the rate volatility. It is not an easy decision and nobody knows what the future would look like thus nobody can calculate the best outcome.
In some situations, choosing a variable rate can help you make the most out of your money. For example, if you wish to refinance your mortgage or sell your home, a variable rate would be ideal. When you break a variable rate mortgage, you are only charged 3 months interest. In most fixed rate contracts the penalty can be 4X to 10X higher.
Another consideration. Moving from a variable rate to a fix rate mortgage with the same lender is easy. The opposite is very expensive as the lender will make you pay the penalty one way or another.
You’re reading this article because you’re unsure about the future of your variable-rate mortgage and want to protect yourself. You are not alone, a lot of families are on the same boat. Based on the factors we’ve listed, if you decide to stick with your variable-rate mortgage, it may be wise to switch to a lender that has a variable rate with a fixed payment (more about this on another post). This way you have a variable rate with a some security with a fixed payment.