Winnipeg Mortgage Brokers - To Stay Variable or to Go Fixed - That is the Question!

There have been a lot of government-imposed changes in the mortgage industry in the past two years. The Bank of Canada has also recently raised its key lending rate to a 10-year-high. (If you are counting, that is 5 rate increases since the summer of 2017). Combined, all of these changes are enough to have Canadians naturally become anxious about their current mortgage; especially if they have a variable rate mortgage (VRM). It might have some homeowners wondering if they "should stay variable or go fixed".

What is a Variable Rate Mortgage?
This type of mortgage product is based on the Bank of Canada's prime lending rate and therefore changes with market conditions. The interest rate is typically lower than those offered for fixed products; however, you need to take into consideration your risk tolerance if you are planning on this option as interest rates could change without warning. You are able to lock in a VRM to a fixed product at any time.

What is a Fixed Mortgage?
This product is based on bond futures and your payments do not increase for the term of your mortgage as your rate is "locked in", so you are protected from rate fluctuations. If, for whatever reason, you find that you need to get out of your mortgage before the end of your term, you could face a high penalty.

To Stay Variable or to Go Fixed?
We spoke to some of our knowledgeable Winnipeg Mortgage Brokers here at One Link for their take on that very question:

For current Variable Rate Mortgage Clients

  • Revisit the reasons you wanted a variable rate mortgage in the first place. Have any of them changed? If not and you can still comfortably afford mortgage rates that are two percent higher than what you are now currently paying, consider staying with your VRM.
  • If you are in a variable rate mortgage, set your payment higher (think 5 year fixed term) as it will give you a buffer if rates do rise and it will also allow you to pay down the principal quicker. Then, if you do decide to lock in, it will be for a shorter length of mortgage term.
  • By staying variable, you help protect yourself from paying high penalties if you need to break your mortgage in the future. The penalties for breaking a mortgage can differ. A fixed mortgage penalty currently is dependent on the lender and can be the greater of 3 months interest or the Interest Rate Differential (which can be a lot higher).
  • Remember the timing of "locking in" your VRM is up to you. It is advisable to keep in contact with your Mortgage Professional and pay attention to how rates are trending so as not to miss your opportunity. Rates can go up much quicker than they come down.
  • If rates do go up, don't panic. Look at the math as it may only be a slight increase to your monthly payment. Check with your Mortgage Professional if you aren't sure.

For those planning to get a mortgage in the future

  • Variable rate mortgages are a great option, but should only be used by sophisticated investors who can afford swings in the Prime Rate and interest rate changes and are willing to "ride out the current storm".
  • If you are thinking of choosing a variable rate mortgage, it is most advantageous to have your payments set up higher than the actual mortgage payment. This way, you will benefit from being able to pay your principal down much faster.
  • Deciding between a fixed or variable product depends on goals, the level of debt being carried and the client's tolerance to risk. If you can afford an extra couple of hundred dollars a month if rates rise, consider a VRM and if not, go fixed.
  • Fixed rate terms offer piece of mind and a certainty of an interest rate for up to 5 years depending on term to maturity. This type of product is a good option for any new home buyer, new to Canada buyer or 5 per cent down payment client.

A final word...
With so many things to consider when it comes to choosing the right mortgage for your situation, be it variable or fixed, it pays to speak to someone who knows ALL the facts. This is where your One Link Mortgage Professional comes in. They understand the subtle differences between mortgage products and can provide you with options and solutions for your personal situation. Whether you are currently in a mortgage and questioning if it is still the "right fit" for you or if you are looking at getting a mortgage in the future and are researching your options, One Link is here for you.

Interested in finding out more about your home financing options? Give us a call today at 204-928-7722.