To Lock in, or not to Lock in. That is the Question.

To Lock in, or not to Lock in.  That is the Question.

With all that has happened on the fixed rate side of the market since June it is understandable that one currently in a variable rate mortgage may be concerned about whether the prolonged stability on the variable side might come to an end anytime soon.

Short Version

It is highly unlikely that the Bank of Canada will move Prime over the coming year or two. Stick with your variable rate mortgage.  In fact if it has a discount of P-.50% of better you would not likely want to even think about locking in.

Looking for a new mortgage?  Purchase, Renewal, refinance? Same story, seriously consider the variable.

Have a proper conversation with an informed Broker and dis-spell the various myths.  (i.e. you can in fact have a fixed payment variable rate mortgage (a favourite for investors).  Prime only has the potential to move 8 times per year when the Bank of Canada convenes its pre-scheduled meetings, and even then, when a rate changes comes, it is typically no more than a 1/4 of a percent.

Longer Version

First off, for a more detailed explanation on how fixed rates and variable rates originate and are able to move in different directions at the same time click here.

Fixed rates were rising since June, will variable too?  Not necessarily. (also as a side note, the 5 year fixed rate has now come down to 3.49% with at least one lender)

Personally I am not locking in either of my two variable rate mortgages, one of which is perhaps the largest mortgage of my life.

There is significant evidence that Prime will stay put for some time to come.

That said lets talk about the mechanics and impact of locking in.

First off Call Your Broker, have a proper conversation with an unbiased party about why you are thinking of locking in with somebody that will quiz you on whether you have any plans to move soon, or to potentially refinance, etc.  Many interesting things can flow from this conversation.  Many question should be asked by both parties.

Following that call if you are still planning to lock in, you will now be aware that you have more options than simply the ‘5 year fixed’ – almost the only mortgage that most Banks seem to want you to think exists.  (The longer the term the bigger the profit margin for the lender, and the Broker – although Brokers do not get paid for a conversion from variable to fixed).

If a client is two years into their five yr. variable they likely have the option of locking into a 2, 3, or 4 year fixed as well as the longer terms, and in many cases this may be the more prudent move depending on the clients potential plans and future needs.  Worth discussing and evaluating.

Then it comes to renewals often I am calling my clients branch for them and cutting through the noise of ‘if you also do this with us we can give you that rate’ and assisting my clients with access to optimum rates simply and directly.  Although this have been more of a renewal scenario I can still pick up the phone and assist with the lock-in, not that I have had to do so just yet.

The bottom line is to strike a balance between ‘the culture of fear‘ as it is referred to, and Spock-like unemotional logic.  (i.e. Strictly speaking it has never been the right day to lock in to a 5 yr fixed product over the past 40 years, not even 1980). Of course this is a simplistic comment and for a client with massive variable exposure and limited streams of income there is that larger conversation to be having.

Over the past few years such conversations with clients typically result in maintaining the status quo.  Wait and see.  This has been a great stance the past 5 years…or 40 years really.

Bottom Line; If you are having doubts, get a second opinion from a Professional Independent Broker – not from your cousins uncles brother that worked at the Bank in the 70’s, your Great Aunts neighbour who read something in Macleans, nor the fellow lingering at the watercooler armed with theories on Aliens, Conspiracies, and Mortgage rates.

A professional. 🙂

Lastly, if you are still trying to achieve certain goals by the end of the year, here is a handy link to keep you focused; http://www.timeanddate.com/counters/newyear.html

Thanks for your time.

 

Dustan

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