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.
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.
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 maximized 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 will make as it can affect them for years to come and could lead to a difference of thousands of dollars of interest cost.
The sudden rise in the rates has led to the widening of the gap between these two options, which makes it a good time to re-think and re-analyze 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.
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 changes 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.
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 rate to a fixed-rate before the costs parachute rises higher.
As variable rates despite the benefits come with the risk of rising or changing anytime.
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.
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 you what is best.