Author Topic: Cdn mortgage rates set to rise? What should I do?  (Read 1504 times)

Kaybee

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Cdn mortgage rates set to rise? What should I do?
« on: July 04, 2017, 07:45:19 PM »
I'm a bit embarrassed to have to ask this but I'm sure others here have a better handle on financial matters and rate watching than I do.

The news I've been reading speculates that the Bank of Canada will be announcing a rate increase (one headline even states 'For real this time" since this has been the story for awhile) due to our current economy.  My variable rate mortgage is currently at 2.05%.  Should I lock in before they make an announcement?  If I do lock in, would you recommend going with a 5, 7 or 10 year term?  It's conceivable that I will keep this condo for another 5-7 years (to rent if I'm not living here myself...it's a GREAT area) but I'm not sure about 10 years...

I feel like my rate is pretty good and I'd rather keep that than have it go up but perhaps those more experienced with mortgages can offer some advice.

backyardfeast

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Re: Cdn mortgage rates set to rise? What should I do?
« Reply #1 on: July 04, 2017, 10:02:08 PM »
I would be cautious about locking in to a fixed rate too quickly.  A couple of years ago it looked like we really were on the brink of a rise, and we locked in and I have always regretted it.  We went from paying 2.65% (I think?) to 3.35%, and then rates went down!  I managed to roll them back a little, and settled in at 3.13, but we still paid way more interest than we could have over the next couple of years.  Remember, too, that when you lock in, you are signing a contract for a new term.  So if you're on a 3-yr variable now, and have a year left, if you lock in, you're signing a new 3-5 year contract that you can't renegotiate without penalty.  When I renegotiated to bring my rate down again, I had to lock in to a new term AGAIN, which meant more penalties when we ended up selling a few years later.  You lose a lot of flexibility in a fixed-rate mortgage, not just the better rate.

I don't know about at your bank, but at mine variable rates are also at 2.05%, but fixed rates are at about 3% and higher.  The rate rise from the central bank will likely be .25%, if they go through with it.  Then we have to wait and see how the banks decide to pass that along.  But at most, the variable rate should only rise that same .25 points, and you would still come out ahead.  I think you have to do the math.

Then I think you have to consider that even if they do go ahead with this rise, that doesn't mean that we're in for more raises in the rates again any time soon.  Everyone will wait and see how the economy--and particularly the bubbly real estate markets--react, and then we're all waiting to see what happens with softwood lumber, pipelines, the new government in BC, and the NAFTA renegotiations all go.  And that's not counting anything else going on in the wider world, or the natural disaster season coming up (forest fires, etc).  I think it could be a while before we see another hike.

Until we see consistent signals that the CB is feeling the stability both at home and globally, it's unlikely that rates will go up dramatically any time soon.  And every month you are paying that variable rate, you are saving money.  You can lock in at any time; so there's no pressure to do it right now.  Remember that the research is pretty clear that people who use variable rate mortgages generally pay considerably less interest over the life of their mortgage than those on fixed rates, so history is in your favour.

My two cents! :)

Kaybee

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Re: Cdn mortgage rates set to rise? What should I do?
« Reply #2 on: July 04, 2017, 10:21:18 PM »
Thanks for the reply!  The mortgage on my first home (which I sold when I moved across the country) was a fixed rate and I think I've just been feeling skittish now that I've started hearing more about rates going up and this is my first time with a variable rate loan.

joonifloofeefloo

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Re: Cdn mortgage rates set to rise? What should I do?
« Reply #3 on: July 04, 2017, 10:37:46 PM »
Kaybee, it's a really tough call, for sure.

I agree with pretty much everything byf said, and add:

There's no way to know :(
No way to know when they will go up or down, how high, how low.

It's worth asking yourself a few questions, based the actual math:
What is the total payment you can afford each month?
What is the max percentage that results in that?
How many months could you afford that?
What is your back-up plan for an increase? (Savings to draw from? Other?)

You could do an in-between option, like:
wait for the rate to reach your max comfort zone
lock in to be able to breathe
but just lock in for one year, hopefully riding out the wave but even worst case giving you time to plan your next steps.

I, too, have read that historically, variable rate wins.
If that remains true, you just need to be ready to ride the increase for a while.

This whole gig, though, is why I don't like having a mortgage in Canada (thus don't have one), and get excited about the US options. I totally understand your concern.

dess1313

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Re: Cdn mortgage rates set to rise? What should I do?
« Reply #4 on: July 05, 2017, 05:18:51 AM »
There have been a lot of media posts suggesting it will go up.  but even if it goes up i think the max they will do is 0.25%, similar to when they downgraded it several years ago.  Most variable rate mortgages are more than 0.25% lower than their standard fixed counterparts.  I wouldn't sweat this raise, its going to be the first one in years. and i doubt they will increase too fast.  if they do they will cause a LOT of problems.  There is too much debt owed in this country for them to rise too fast. 

By summer, see if the rates are still predicted to rise later this year and reassess.  How much longer do you have on your term on your mortgage?  Depending on your contract, like backyardfeast mentioned, locking in may force an early renewal costing you $$ that is not likely worth it.

backyardfeast

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Re: Cdn mortgage rates set to rise? What should I do?
« Reply #5 on: July 05, 2017, 10:12:11 AM »
I just wanted to add that it's also perfectly ok to think this through with your own stress levels in mind.  I still wouldn't lock in right away out of fear, and I would still do the math to see if you are comfortable once you work through the logic.  But if, at the end of the day, the uncertainty stresses you out too much, it's totally ok to lock in.  Rates are still crazy low.