How to handle interest rate hikes

Let’s cut right to it – finances is one of those topics that many of us hate to talk and/or read about, but it’s nearly impossible to escape; especially when you have a family to budget for.

With that expressed, new and existing clients of mine have recently come to me with questions about the interest rate hike by the Bank of Canada (BoC), which has increased its key rate by 0.25% – the first hike in seven years.

With this increase, banks and lenders have pushed their Prime rates from 2.70% to 2.95% meaning that those with existing variable rate mortgages (VRM) or adjustable rate mortgages (ARM) will see an increase – more money to the bank, yippee!

Knowing this (and as many in the industry expected) I’ve seen many articles screaming “LOCK IN TO A FIXED RATE YESTERDAY”….or….”We told you not to go variable…suckers!”, while others are offering that we should all calm down and not create reason to panic that isn’t necessarily there.

So, which is it?

Should we panic? Should we lock in before it’s “too late”!?

By the numbers…

In terms of how this increase will affect an existing variable mortgage, a 0.25% rate hike translates to $13.00/month payment increase per $100,000 of mortgage money.

In terms of your rate, after increasing it by 0.25%…how does it look? What if the BoC raised the overnight rate again, by another 0.25%…how might your current rate and monthly payment look with a total increase of 0.5%?

As not every lender offers the same discount against Prime (can be anywhere between Prime -0.30% to Prime-0.90%), some clients may still have “lower” rates since the increase, while others could have surpassed the average fixed rate after one or two increases.

Here’s what we know – rates have gone up, and there’s an indication that rates may very well go up once more in the fourth quarter of 2017. As a result, variable rate mortgages (specifically) are no longer as attractive to new clients as they were just a week ago today. Clients with existing variable rates are a little worried, and question locking in to a fixed rate.

My current stance?

I still like the variable rate for my family, and also for many of my clients. I am currently in the first year of a five-year variable product, with a great discount as offered by many lenders. And while the interest rate is very important to me and the majority of my clients, it is not the “most” important part of my mortgage.

The reason I initially chose a variable mortgage, outside of the discounted rate, was because of the penalties associated with said product. A variable rate mortgage will almost always charge less in penalties should you need to break your mortgage early, than would a fixed rate. As my family may or may not stay in our current home for 5 years, it was the wiser choice (all things considered), for us.

For those of you who have read this far and have an existing variable rate, I strongly suggest that you contact a Mortgage Agent/Broker to sit down and review your particular situation.

Chances are that the initial rate discount provided to you is still better than many fixed rates, after one or two increases to Prime, providing no reason to make any changes or get worried. I would add that even if your rate climbed a few points higher than the average fixed rate, maintaining the options that accompany a variable product may still be a much better option than locking in to a fixed product.

Conversely, you may not have chosen the variable product for the right reason and perhaps it’s time for you and your family to lock in and avoid any potential further increases. Please note, however, that your lender is not likely to offer the same rates being offered to new clients, should you decide to lock in – this is certainly something you’ll want to chat about with a Mortgage Professional.

That being established, and as previously mentioned, not all families are the same and as such, neither should be their respective mortgages. If your budget allows for some flexibility and you can stomach the possible risk of rate increases in the future, or should you know that your family is likely to break their mortgage early, a variable product is likely the best choice for you.

If you don’t like any level of risk and would rather lock in for 2-5 years, knowing that you’re not likely to break that mortgage early (the average mortgage is broken after 38 months), then a fixed rate is best for you.

Before making any knee-jerk reactions to the latest change in rates, I strongly suggest meeting with a Mortgage Professional to go over the scenarios specific to you and your family because here’s the thing – anyone in our industry who call themselves a professional cannot, and should not tell you that they know what is going to happen with rates moving forward; we don’t.

That being said, we do offer guidance and educated opinions based off experience and historical trends in the industry.

My job as a licensed Mortgage Agent is to advise and present all options and scenarios to my clients, as each and every client differs enough to need different options, terms, and with that, rates.

If you have more specific questions that were not fully covered above, feel free to reach out to me at any time – always happy to help!

Colin Dambrauskas, DCL Member

Mortgage Agent (16001969)
Dominion Lending Centres – Forest City Funding
905 Oxford Street East, London ON
tel: 519.777.0474 / fax: 519.451.6300
colind@dominionlending.ca
www.colindmortgages.ca