Mortgage Blog

Should I Stay Variable or Should I Lock In?

September 30, 2019 | Posted by: Carlos Tovar

Your situation is going to be different from your neighbour, your best friend, any other home buyer or owner. Here are some important questions we need to tackle to determine if converting from a variable to a fixed term makes sense.

  1. What is the current discounted rate you have?
  2. When is the mortgage up for renewal?
  3. Have there been any, or do you expect any, life changing events in your near future? I am talking about changing careers, an addition to the family, large reno project etc.
  4. What does my payment change to if the Bank of Canada raises rates again?
  5. Do I have a large balance on a line of credit?
  6. Is all this talk of interest rate increases stressing you out?

Remember, you were qualified at a rate that was likely near the 5% range and therefore you should be able to carry the weight of the additional increase in your regular payment. Here is the math: 

For every $100,000.00 mortgage balance you have, a quarter point increase will cost you about $13.10 more a month. 

For example, a variable-rate mortgage with a balance of $400,000.00 will see a payment increase of $54.40 per month

One thing to remember is that you don’t have to convert your mortgage to a 5 year fixed rate. The term should be dependent on how much time has already gone by in your mortgage term. In other words, the time elapsed plus your new term should be equal to or greater than 5 yrs. If you are 3 years into your variable rate and are nervous about rates going up, you can convert into a 2-year term or greater.

If you are thinking about locking in your mortgage, you need to answer the following question: Is there any chance I will break my mortgage before renewal? and you also need to know:

The penalty to prepay a variable mortgage is ~0.50% of the mortgage balance.

The penalty to prepay a 5-year fixed mortgage can increase by ~900% to ~4.5% of the mortgage balance. A hughe increase in risk.

Your situation is unique to you. Contact us and let us help you make the decision.

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