Customers who are nearing the end of their fixed-rate term may be better off paying early exit penalties and securing a new deal
Even though there was a drop in some of this week’s fixed-rate mortgage products, some rates are expected to go up this year. Why the inconsistency between fixed and open rates? Fixed-rate mortgages follow bond yields, which have fallen recently. Variable rate mortgages reflect changes in the Bank of Canada’s prime rate, which is expected to rise.
There are ways to cushion the blow of rate hikes and make sure mortgage hikes are not a shock to your financial system.
“If the client is in a variable rate, which has the most fluctuation potential in the short term, I suggest they base their payments on a 4% fixed rate rather than making the lower payments based on today’s 2.25% variable rate,” says Gerri Vaughan, mortgage broker with Invis in Edmonton. “That way, they’re paying more towards the principal and they won’t have a payment shock when rates do start climbing.”
For clients who are already locked into a fixed rate, Ms. Vaughan says now is a good time to review their mortgage to work out if they should pay a penalty and renew early.
“It will really depend on what kind of pay-out penalty their existing lender is going to charge,” Ms. Vaughan says. “You have to look at those on a case-by-case scenario.”
Ms. Vaughan says borrowers who recently secured a low fixed-rate mortgage, and have a number of years remaining on their deal, are unlikely to benefit from an early renewal. However, customers who are nearing the end of their fixed-rate term may be better off paying early exit penalties and securing a new deal.
“Do an annual review of where things are with the mortgage. What are their plans over the next 12 months, are they planning to consolidate debt are they planning to do some renovations?” says Ernest MacDonald, a mortgage broker with Mortgage Intelligence in Halifax. “Does it make sense to renegotiate the mortgage now, to lock in low rates for the next five years, say?”
For clients considering buying a home within the next few months, the advice is get pre-approved.
“Even if they think they’re not buying for a few months most lenders will hold their rate for 120 days. If they’re locked in and rates shoot up, it protects them. If rates go down they always get the lower rate,” Mr. MacDonald says.
About 18% of respondents to a BMO Bank of Montreal survey last month said they would struggle to meet mortgage payment if rates rose. Ms. Vaughan says it is critical to be certain of your finances before contemplating homeownership.
“Be secure in your financial position and be comfortable that you’re going to have a job going forward,” Ms. Vaughan says. “The rates are good, the prices are good depending on where you are in Canada. It’s a good time to look at homeownership without overextending and being house poor; that’s no fun.”
Mr. MacDonald says having an overall financial plan is crucial.
“We’ve had pretty easy access to credit over the past 15 years. It has led to a lot of people not really knowing where all their dollars are going,” Mr. MacDonald says. “It really comes down to paying attention to where your money is going and being prepared if rates do go up.”