OTTAWA — Homeowners with variable rate mortgages losing sleep over the increased chatter about a potential interest rate hike by the Bank of Canada should consider locking their rates in now, mortgage experts say.
James Laird, co-founder of interest rate-comparison website RateHub, says in order to stick with the variable option you need to be able to handle fluctuating rates.
“Rates might go up much faster than anyone is expecting and so if you’re right on the border of being able to afford your mortgage payment and you’re able to lock in an affordable payment for five years, you should definitely do that,” Laird said.
Recent comments by the Bank of Canada have prompted speculation that it may move to raise its key interest rate sooner than many economists had expected.
The central bank has kept the rate on hold at 0.5 per cent after cutting it twice in 2015 in an effort to boost the economy.
An increase in the Bank of Canada’s overnight rate target will prompt the country’s big banks to raise their prime rates, which will push the rate charged on variable rate mortgages higher.
The U.S. Federal Reserve has already started to raise its key interest rate with the latest quarter point increase on Wednesday to a range of one per cent to 1.25 per cent.
Laird said historically borrowers who have chosen the variable rate mortgage have done better than those who have opted to lock in their rate. But he points out that variable rate mortgages are only about half a percentage point lower than the fixed rates that are being offered today.
The best five-year variable rate posted on RateHub.ca was 1.8 per cent, while the best five-year fixed rate was 2.24 per cent.
“If prime moves up by, say, 50 basis points then most variable rates would be higher than the fixed rate that you can lock in at today,” Laird said.
He noted that the rates on fixed-rate mortgages also may soon be on the rise following a recent increase in the yields on Canadian government five-year bonds, a key benchmark.
The possibility of an increase in the prime rate offered by lenders comes as household debt levels sit near record highs.
Jason Scott, a mortgage broker at TMG The Mortgage Group, said homeowners need to weigh the risk versus the reward when opting to continue with a variable rate mortgage.
He said a strategy for those with a variable could be to increase your payments as if rates were already higher, paying down more principal before rates rise.
“Or if they are going to lose sleep at night, they can choose to lock in,” he said.
For those that decide to lock in, Scott said, your existing lender may not offer you their best fixed rates so you should be prepared to negotiate or even switch lenders.
However, he noted there have been many times in recent years when it looked like the Bank of Canada might start to raise rates, but then it held steady.
Something unexpected could happen to prompt the central bank to put off raising interest rates, Scott said.
“Only Stephen Poloz really knows what he’s going to do next and when he’s going to do it.”