Are You in a Variable-Rate Mortgage? Me Too.
If you’re in a fixed-rate mortgage, this news has no impact on you. Mind you, ‘impact’ is too strong a word for the subtle shift that occurred Jan 17, 2018.
The math is as follows:
A payment increase of ~$13.10 per $100,000.00 of variable-rate mortgage balance (unless you are with TD or a specific credit union, in which case payments are fixed and change only at your specific request)
For example, a variable-rate mortgage with a balance of $400,000.00 will see a payment increase of ~$54.40 per month
Personally, we are staying variable, for a variety of reasons…
Qualification for variable-rate mortgages has been at 4.64% or higher for some time. This requires a household income of greater than $70,000.00 for said $400,000.00 mortgage.
Can 99% of such households handle a payment increase of $54.40 per month? Yes.
Will 99% of households be frustrated with this added expense? Yes.
Ability and annoyance are not the same thing.
Have these households enjoyed monthly payments up to $216.80 lower than those that chose a fixed-rate mortgage originally? Yes.
Are 99% still saving money over having locked into a long-term fixed from day one? Yes.
Should I lock in?
A more important question is ‘Why did we choose variable to start with?’ And this may lead to a critical question, ‘Is there any chance I will break my mortgage before renewal?’
The penalty to prepay a variable mortgage is ~0.50% of the mortgage balance.
The penalty to prepay a 5-year fixed mortgage can increase by ~900% to ~4.5% of the mortgage balance. A massive increase in risk.
There are many considerations before locking in, many of which your lender is unlikely to discuss with you. It’s to the lender’s advantage to have you locked into a fixed rate; rarely is it to your own benefit.
At the moment decisions are being made primarily out of fear. Fear of $13.10 per month per $100,000.00
What about locking into a shorter term?
Not a bad idea, although this depends on two things:
- Which lender you are with, as policies vary.
- How many years into the mortgage term you are.
If your net rate is now 2.95% and you have the option of a 2-year or 3-year fixed ~3.00% – this may be a better move than full 5-year commitment.
Do not forget the difference in prepayment penalties. This is significant.
Bottom line: Know your numbers, know your product, stay cool, and ask your Broker.
These are small and manageable increases.
It was a bit disappointing to see logic and fairness fail to enter the picture after the last two Federal cuts to Prime in 2015 of 0.25% each. The public received cuts of only 0.15% each time.
Every single lender moved in unison; not one dropped the full 0.25%.
Amazingly, not a single lender saw fit to increase rates by the exact same 0.15% on the way back up. Every lender has instead increased by 0.25% – a full 100% of the increase passed on to you, the borrower.
Not cool man, not cool at all.
We share all the pain of increases, and get only part of the pleasure of decreases.
I am disappointed by this. Not surprised, but disappointed.
Have an excellent day!