Now might just be the best time to lock into a fixed-rate mortgage, especially for those homeowners on a tight budget, according to an expert broker.
The Bank of Canada hiked its overnight lending rate by 25 basis points Wednesday, and variable mortgage rate products offered through major lenders are expected to rise in step.
Despite Wednesday’s increase, variable rates -- hovering between 2.05% and 2.25% these days -- still offer savings compared to fixed-rate plans in the near term.
But there is an argument for locking into a fixed rate sooner rather than later, said Gary Siegle, a Calgary-based regional manager at Invis.
The rate for the popular five-year fixed mortgage has recently dropped to a commonly available 3.89% and is as low as 3.6% in some cases.
We haven’t seen rates this low in recent memory, Siegle said.
“There are lots of people out there who are saying: Why would you overlook the fact that we haven’t seen five-year rates this low in a long, long time?
“Why would you not take advantage of historic low interest rates?”
Unfortunately, the answer isn’t clear-cut, Siegle said.
Some people are choosing to overlook low fixed rates because the variable options are still cheaper and may be for some time.
However, mortgage holders do need to consider that variable rates do change eventually.
“And the direction everyone is predicting that they’ll go is up. It’s a question of how much and when,” Siegle said.
Floating rates have historically been the cheaper option over the entire life of a mortgage but not everyone can stomach the often dramatic swings in monthly expenses.
“It’s a question also of psyche,” Siegle said.
People who are generally nervous or who are on a tight budget might be better off locking in now, he said.
“Even though they are giving up that 1.25%, they are gaining a lot of peace of mind.”
Homeowners considering the switch to a fixed plan could look into whether there is penalty for switching mid-term, Siegle said.
Either way, both variable and fixed-rate mortgage holders can take advantage of current borrowing prices by paying down as much of the principal amount as quickly as possible. That way, as rates go up, total debt burden will be lowered come renewal time.
Whereas the central bank influences variable rates, the bond market influences fixed-rate mortgages.
The slower-than-expected economy has fuelled investor interest in the bond rally, pushing yields down and allowing banks to offer attractive fixed-rate products.