The debate continues. This past July the Bank of Canada decided to raise interest rates for the first time in a while. In fact, they just increased it a quarter percent again and it now sits at a full 1% since July’s quarter-percent hike took it to .75%. While rates are still historically low compared to say, the 80’s (think *gasp* 21%), any small upward change can have a big effect on those just barely making their mortgage payments. Big banks, of course, followed suit and raised prime lending rates from 2.7 to 2.95 and you can bet that will go up again hitting those in a variable mortgage. These increases will also affect home equity lines of credit.
So the big question when interest rate hikes become reality is whether or not to lock in and steer away from a variable rate mortgage.
What do the experts say?
James Laird, co-founder of interest rate-comparison website RateHub, tells the Canadian Press in order to stick with the variable option you need to be able to handle fluctuating rates.
“Rates might go up much faster than anyone is expecting and so if you’re right on the border of being able to afford your mortgage payment and you’re able to lock in an affordable payment for five years, you should definitely do that.”
Rates, of course, don’t always go that way. There have been many circumstances over the past several years when it looked like the B of C was going to increase rates, and they didn’t.
Laird might be totally correct in assessing that rates could keep going up, but we don’t really know. We can speculate of course because what goes up could invariably go down right? A crash in the price of oil in 2015 saw the B of C drop it to 0.5%, lower than it had ever been. Any rate hike is going to hit those in a variable mortgage whereas those already locked in might be smiling politely. The other thing to think about is variable mortgages tend to perform better over time as interest rates have trended down over the last thirty years.
It’s all about risk tolerance.
Ryan McKinley is with Vancity Credit Union and tells CTV News:
"What I always tell people is if you are concerned, if you're going to stay up at night, worried about your variable rate mortgage, then it's not worth taking it."
Bottom line...if you can handle slight increases in your mortgage, over 25 or 30 years a variable rate should still save you money. But if you’re on the cusp when it comes to payments, locking in is the way to go.