Variable Rates - They Do More Than Just Increase?
September 7, 2017 | Posted by: Shayne Beeler
Let’s go back to 2010, a year where the Prime Rate increased three times. I recall the headlines at the time – it’s hard not to buy into the surprise of the sudden increases and it’s even harder to get someone to read your article if the headline doesn’t grab your attention.
So the hot topic right now is Prime Rate increases and along with it, variable/adjustable rate increases (along with your credit lines – whether home equity or unsecured). I’ve talked about the actual impact of rate changes on your payment in the past – please see “Mortgage Rate Changes – Guess The Payment”. Today, I want to talk about the other aspects of a variable rate mortgage that are getting a bit (a lot) less press at the moment:
Payout Penalty – in this regard, a variable rate product remains the most flexible low-cost option for borrowers regardless of the headlines. There’s a much higher than expected percentage of Canadians that don’t reach 5 years on their mortgage term. In some cases, a payout penalty becomes inevitable and being in a variable product can save up to 4 times the cost of a fixed rate payout penalty (fixed rate penalties vary greatly depending on the lender and the time during the term that you’re paying out early). I often remind clients that your cost isn’t simply the interest you pay but rather, the total dollars that go from you to the lender that holds your mortgage, which can also comprise penalties and additional fees.
Rate Decreases – based on current headlines, this is the last aspect being discussed right now. In 2015, there was actually talk of potential rate increases with the surprise that year being 2 rate decreases, which of course lowered the payments on anyone’s mortgages/products tied to the prime lending rate
Conversion – variable rate mortgages can be locked into a fixed rate at any time. The key factor here to remember, is how far you are into your current term. The large majority of lenders will let you lock into a 5-year rate if you’re currently in a 5-year variable but haven’t reached the 1-year mark year. After the 1-year mark, you could lock into a 4-year or 5-year fixed and after 2 years, a 3, 4 or 5-year fixed, etc. This is where consultation is recommended as everyone’s situation could align with different strategies (when to lock-in vs. not).
So do I love rate increases? Not really, I’ll admit it. Anytime headlines shock us and nudge some people toward any level of panic, it’s natural to wish that scenario wasn’t upon us. My advice – we must always look at the entire picture and do our best to take headlines in stride.