- Should you lock in your variable rate mortgage?
No.
Okay, so here's a question on everybody's mind right now
with Bank of Canada increasing rates,
and subsequently, all the banks
increasing their prime rates.
The question is, "Should I lock in
"my variable rate mortgage?"
So what we're going to do is approach this in two steps.
First, is we're going to look at the reasons
why you shouldn't lock in your mortgage.
The second is we're going to look at it
from the perspective of why you should,
and when you should.
And in the midst of that, what I'm going to do
is I'm going to throw in a little bit
of a story about ourselves, and how
locking into a five-year fixed was almost
the biggest mistake we ever made.
So let's start with the five reasons why you shouldn't
lock in your mortgage.
The first reason you shouldn't lock in your mortgage
is if the interest rate that you're going to be
locking into is higher than the rate
that you've got on your current variable.
You know, you took that variable rate out
for good reasons when you started.
To go and lock it in at a higher rate
than what your current rate is,
pretty much takes away all the advantage
that you were looking for when you first got that mortgage,
when you first made that right decision.
The second reason why you should take
a variable rate is,
you should always take the lowest rate you can get
when your mortgage is the biggest.
If that means taking a variable rate,
or a one-year, or a two-year,
you always just take the lowest rate,
because the time when the mortgage is the biggest,
and the amortization is the longest,
is when you're going to be able to save the most money.
The third reason you shouldn't lock in your
variable rate mortgage is the last time interest rates
were this low was in the 1950s.
And do you know how long it took for interest rates
to raise just five percent?
It took 30 plus years.
So if you're thinking, "Oh shoot,
"I'd better lock in my mortgage because interest rates
"might go up five, 10 percent like they did in the 80s,"
well, forget it.
It's going to take a long time for interest rates
to jump that far.
And if the 50s were any consideration,
you've got some time to think about your options.
You know, during that period, from 1950
to the 2000s, if you were to take a variable,
you have won 89% of the time.
Now keep in mind, from 1950 to the 1980s,
rates were going up consistently almost all the time.
There were very little times when the rates
were actually coming down.
Now, if you cut out the 20 years before that,
and you look at 1970 to 2000,
you still would've won with the variable 74% of the time.
So here's what you got to look at
when you have a variable rate.
And this is the fourth reason why you should
stick with your variable.
If the rate you can get on a variable
is lower than the rate you can get on a fixed-rate mortgage,
you win almost 100% of the time.
The only times when fixed mortgages really beat out
variable rate mortgages is when the fixed rate
is actually lower than the variable at the time
that you get the mortgage.
Remember, always take the lowest rate you can get.
Sometimes that's going to be the fixed.
Most of the time, it's not.
But when it is, you take advantage of it.
And the fifth reason why you shouldn't take
a variable rate, or lock into a variable rate,
is the penalties.
And this is where our story comes into play.
You know, the first several properties I ever bought,
I went variable.
All the way. Across the board.
Every single one of them.
And I never had more than a three-month interest penalty.
Then, when Jen and I had Jackson,
we moved into a bigger house,
we figured, "Hey, you know what?
"We're going to take the fixed," because it was such a
low rate at the time, it was like 3.09%.
And we figured, you know, the chances of rates going down
were pretty much slim to none.
Turns out we made a bad decision.
Not only did rates go down, but about three years later,
when we decided that we were going to start a business,
we needed access to some of the equity in our property.
You see, we had spent a lot of time
increasing our payments, in order to get
our 30-year amortization down to an 11-year amortization.
Then, when we needed the money out of the property,
we went to the bank to refinance,
and our penalty was $25,000.
It should have been about 3500.
So that $25,000 penalty prevented us
from accessing the money we needed to start the business.
So what did we do?
We started the business anyways, and you know what,
it's gone great.
But what ended up happening is,
we ended up using personal lines of credit.
We ended up using other sources of borrowing
in order to fund the business.
I remember one February, we looked at it,
and we had $200,000 equity in our house,
and we had about $4000 in payments that we had to make,
and we were just on the brink of not being able
to make that payment.
It was one of the scariest financial moments of my life,
a moment I swore I would never find myself in.
And the whole reason it existed was because
we had that $25,000 penalty.
We couldn't get out of the mortgage that we were in.
If we had been in a variable rate mortgage
like we had always told our clients to be in,
we would have been fine.
Three months interest penalty, $3500.
We would have borrowed the money on a
low-interest line of credit that was
attached to the property,
but that five-year fixed mortgage
and that $25,000 penalty almost caused us
to miss the first payments we'd ever missed
in our entire lives.
So penalties are a big reason
to avoid that five-year fixed if you can.
Even if it means having a little bit of exposure
on the interest rate, 'cause let me tell you this:
if we would've ended up paying a percent higher in interest,
with the variable rate mortgage instead of
the fixed- rate mortgage, you know what?
At least we wouldn't have had that $25,000 penalty.
That 1% would've been far less than the $25,000
we had to pay on that penalty.
So for the most part, variable rates make sense
most of the time, and for most people.
But there are a few exceptions.
There's three definitive reasons why you should
lock in your mortgage.
And they're really simple.
The first reason you should lock in your mortgage
is if you can get a fixed interest rate
on a one, two, three, four, or five year term
that is lower than the variable rate.
The second reason is if your budget's tight,
and you can't afford the fluctuations in the payments.
Now, this is a double-edged sword,
because if your budget's tight and you can't afford
the fluctuations, you really have to watch
for what's going to happen five years out.
Because in five years, if your interest rates go up,
you're going to need to be able to budget for that.
But for right now, if the budget's tight,
fixed mortgage is probably the place to be.
That way you know your payments won't fluctuate.
The third reason you should probably get
a fixed-rate mortgage is if you're a first-time
home buyer, and you're buying at the maximum
that you can afford, or if you got a gifted down payment.
The reason why we're concerned about
the gifted down payment is this:
if you haven't had the ability to save money in the past,
you likely can't afford fluctuations in the payments.
So what we want to see if you get a gifted down payment,
is the ability for at least five years
to make the payments on a consistent schedule.
Now most of the time, when our first-time
home buyers come out of their first five year fixed,
we recommend that they get into a variable rate mortgage.
Because at that point, they've got five years
of managing money under their belt,
they're usually good to go.
So I mean, there you have it.
We've basically got five really good reasons
not to lock in your variable rate.
We've also got three really good reasons
to lock in a variable rate.
Regardless of what you do, just understand one thing:
this is all about comfort level.
If you aren't comfortable with a variable rate mortgage,
don't lose sleep over it at night.
In fact, when we sit down with clients,
and we ask a couple who's sitting across the table from us
whether they feel uncomfortable if interest rates
were to go up overnight.
If one of the two hesitates, we usually recommend
that they go into a five-year fixed.
Or, at least some sort of fixed-rate mortgage.
By the way, we've had a lot of success
with two and three year fixed mortgages as well.
Which is so often the happy medium between the two.
So don't panic just because the Bank of Canada
increased interest rates.
Take some time, think about where you're at financially,
if you can handle the fluctuations in payments,
stick with the variable, because there's a
really high likelihood it's going to
save you money over time.