Since fixed mortgage rates started to climb and news of higher interest rates are on the horizon there has been one question on everybody's mind: Should I stay variable or go fixed?
Over the last 20 years borrowers have saved money by choosing variable mortgage products. But a risk of rising interest rates, as the economy recovers and inflation rises, means there is a chance on the horizon that variable rates could climb high enough and allow fixed rates to actually be the cheaper alternative at this time.
Mortgage rates in Canada rose in April 2010 quite rapidly, causing widespread speculation that higher borrowing costs will finally slow the Canadian housing market down. Five-year, fixed rate mortgages jumped .75 basis points in April alone. Given the amount rates have risen in a short period of time, many Canadian home owners and potential home owners are wondering whether this is a good time to lock in.
The last time fixed rates had the advantage over variable rates where in the late 1980's which turned out to be a very big inflationary period of time which is not the case this time and is unlikely to happen in the near future.
Currently the Bank of Canada's benchmark rate is about as low as it can go leaving little room for further downside swings so the only direction they can go is up but the question still remains how high and how fast. Certainly a period of quick growth could provide enough reason for the Bank of Canada to raise interest rates quickly but inflation has been below it’s target of 2%, little private sector spending has occurred to take up the reduction in government spending, personal debt is at all time highs preventing the consumer of pulling us out of this recession quickly, and the rising Canadian dollar combined with little growth in the USA will put further pressure on the bank to not raise rates prematurely.
The answer is not an easy one and really depends on your tolerance for risk. You may choose to go fixed and sleep better at night or you can decide to take more risk with greater potential rewards and stand firm with a variable rate mortgage, the choice is ultimately yours. One thing you can do to reduce your exposure to risk and receive the maximum benefit for a variable rate mortgage is make payments based on a 5 year fixed rate which will knock several years of your mortgage and if rates do go higher at least you will pay the higher rates on a smaller principle amount. Another benefit of this strategy is you could potentially shield yourself from increases in payments due to higher interest rates having a negative effect on your amortization ultimately raising your payments due to the cushion you have built up by making the higher payments in the first place.
For more info or to discuss your current situation call a Mississauga Mortgage Broker: 416-204-0156
Paul Mangion
Principle Broker
416-204-0156
paul@paulmangion.com