My Mortgage Consultant Advice –
Canada’s economy is only expected to recover fully by 2022, with vaccination rollout permitting and people completely getting back to their work. So 2021 is going to be a financially challenging year, with Canadians struggling with their sinking financial health.
Mortgage rates are all-time low, it is time for Canadians to decide whether 2021 is good for locking in fixed rates or go for variable rates or simply save, get out of debt or invest.
Since 2020, mortgage rates have been continuously dropping due to the Covid crisis but since the beginning of 2021, five-year fixed mortgage rates have been showing an ascent while variable mortgage rates are still lower.
Fortunately, if you are currently in the market, you are lucky as despite the increase, rates still remain historically low. Currently, you can easily get a five-year fixed mortgage for as low as 1.5-2%.
Historically, people who have always opted for variable rates in the past decade have saved the money and increased their savings. But this might not continue, as rates are already remarkably low and can only see a rise in the coming months.
With fixed rates rising, is it time for changing the game plan?
Well, it depends. It is essential to choose a mortgage plan that suits your needs.
The decision of selecting variable vs fixed mortgage rate is one of the major choices that a borrower has to make. These rates can affect them for years to come and could lead to a difference of thousands of dollars.
The sudden rise in the rates has led to the widening of the gap between these two options. This makes it a good time to re-think and re-analyse on the age-old question of fixed vs. variable.
FIXED-RATE VS VARIABLE RATE
- In this type of mortgage, the interest rates remain the same over the term of the mortgage. The rate is locked for a period of time, usually 5 years.
- The rate is a bit higher but offers a sense of stability, consistency in mortgage payment for years to come.
- However, there is a volatile and dangerous penalty for breaking the mortgage term called Interest Rate Differential Penalty.
- It is not possible to switch a fixed rate into a variable rate without breaking the mortgage.
- Lastly, due to less risk, this type of mortgage is predictable, can be easily budgeted for and is convenient.
These can be of two types where rates can vary with market interest rate generally known as “Prime rate”
1.Adjustable-rate mortgage – In this, the rate automatically adjusts with changes in prime rate, maintaining the original amortization schedule.
2.Variable-rate mortgage – In this total payment amount remains fixed and increasing or decreasing of the prime rate leads to either payment of mortgage interest or principal amount.
In this type of mortgage;
- The rates float or change with time, due to decisions from the Bank of Canada.
- The rate is often set using a discount off of the Prime Rate (ex. Prime minus .50%).
- Mostly the variable rate is lower than the fixed-rate but can involve the risk of being higher anytime.
- The penalty is lower and precise, unlike in a fixed-rate mortgage for breaking the mortgage.
- Variable-rate mortgage can be easily switched to a fixed-rate any time without breaking the mortgage.
However, breaking the fixed mortgage can have brutal results leading to costs of thousands of dollars. Many Canadians either break or adjust their five-year mortgage before the term is up due to, i.e. sell the house, refinance it to get equity, etc.
With warnings about rising inflationary pressures, bond yields have surged, which has led to a spike in fixed rates too. While variable rates are still nailed to the floor, a lot of people are planning to convert their variable mortgage into a fixed-rate. As the cost parachute may rise higher.
As variable rates despite the benefits come with the risk of rising or changing anytime.
Mortgage with five-year fixed rates come with risk as well and anyone choosing a five years fixed mortgage today may end up locking in a temporary rise. With inflation fears on the rise, if rates fall back , fixed rates will be more expensive than variables.
So, people who can tolerate some uncertainty and still sleep well can go for variable rates. Whereas, those looking for certainty and cannot worry about the rising costs should prefer a fixed rate.
As the impact and effects of COVID-19 sweep through the Canadian economy, we will witness that even though fixed rates are now considerably low and are a perfect solution for many, the answer for many, would still be variable.
So for figuring out how to pivot, adjust mortgages in 2021, it is highly desirable to consult a qualified and experienced mortgage mentor like My Mortgage Consultant who can run through your calculations and advise on the best-suited mortgage solution.