With news of imminent interest increases paired with a scorching Toronto real estate market one of the recurring hot topics du jour is what kind of mortgage should a buyer take right now. It must be said that we, Liberty Village’s Condo Team – the Camber Group, are NOT mortgage experts. We recommend you speak to your lender or a professional Mortgage Broker. We heard from a great one and wanted to share his take on the current mortgage climate for Torontonians looking to secure a new mortgage.
Below, we share some thoughts from James Harrison, AMP, President/Broker of Mortgages.ca.
In the last couple weeks, I have had countless clients reach out to ask if they should “lock in”.
As you may have seen or heard in the media, there is a lot of fear circling around, and the latest fear is: “Mortgage rates are going up”.
It is in the bank’s best interest to say things like this, to scare people into locking into a fixed rate product, which is more profitable for them.
I am still highly recommending a variable today, for any new client’s mortgage. I also recommend clients stay in their current variable, or break it and get a new variable rate mortgage, if there are better discounts.
Is the prime rate likely to go up at some point? YES
BUT, my estimate is it will not be by a lot.
In my opinion, it will still be well below the fixed rates of today.
Most variable rate clients have around 1.35% to 1.65% or better, and fixed rates are now around 2.7-2.9%, which is more than double the average variable. Therefore, if you lock in, you will be self-imposing a rate increase of six rate hikes (1.50% assuming the historical increase of 0.25% per BoC meeting), on average. This link shows the prime rate changes over the last 20 years. You will see that the last time it went up 1.50%, it took 7 years:
https://www.mcap.com/residential-mortgages/advice/mortgage-rates-canada/prime-rate-history
I would however, highly recommend increasing your current minimum payments by $200-400 a month or so, or whatever is comfortable for you. This way the additional payments go towards paying off the principal, instead of interest, while saving you thousands in interest costs and paying off thousands in principal while you wait. 😊
In case you missed my email in November, here are some updated highlights and the same amazing video which is still relevant today from the President of Mortgage Architects on the subject of “should you lock in”.
Please read all below:
1) The primary reason: Once you lock into a fixed rate, your future potential prepayment penalty goes up 900% on average.
No client plans on breaking their mortgage, but over 70% of Canadians do for one reason or another, and over 85% of Canadians will either move or refinance every 3.5 yrs. In other words, the probability is high. Simply put, life happens.
2) If you lock in, you are self-imposing a rate increase that is 5 to 6 times greater than any Bank of Canada rate increase, as the average fixed rate is 1.50% higher than variable today, (assuming the average 0.25% increase per BoC meeting).
https://www.mcap.com/residential-mortgages/advice/mortgage-rates-canada/prime-rate-history
3) The prime rate would have to go up 12 times in the next 5 years for you to lose money comparatively (when comparing fixed to variable today).
4) If you are concerned about your payments going up, give me a call. We can lock into a variable rate around 1.35 to 1.55% with a fixed payment 🙂 getting the best of both worlds (variable product with a fixed payment = Win Win).
5) If you think that the prime rate will go up, simply increase your payments now (maybe $200-300 a month). This way, you are paying off principal instead of interest while you wait, and you maintain the FAR superior terms and conditions of the variable product!
Pay off your mortgage (ie: put it in your pocket – not the bank’s profit margin).
6) If you have a variable rate mortgage, your Bank/lender will call you to scare you into locking in your variable rate to a fixed. I promise you this will happen.
Why? Because it is in their best interest, not yours. The fixed rate is more profitable for the banks, especially the 5-year fixed.
Don’t get mad. They are a business, and a very successful one at that. Just buy more of their stock and enjoy the dividends.
The prime rate goes up and down – not that often, but it happens. The bottom line is that those who take a variable rate mortgage, pay less total interest than those who go fixed (every time for the last 25 years). PLUS they benefit from far superior terms and conditions – if life happens.
Life is Variable – Your mortgage should be too!
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