It’s that time again: Your mortgage is up for renewal and you need to decide what type of loan is right for you.
In Canada, there are two types of financing: Fixed rate and variable. There are advantages and disadvantages to both.
A fixed-rate stays the same throughout the entire term of your mortgage.
The advantage is you never have to worry about rising interest rates driving up your monthly payment.
The downside? When you’re locked into a term, you can’t take advantage of lower rates. You might also face steep penalties if you end your term early.
A variable rate changes over time.
The benefit is that the initial rate is often much lower than a fixed mortgage. The breakage costs if you leave your term are also much lower.
The disadvantage is that your rate can change. Sometimes, you’ll be lucky and your rate will drop even further. But often, the rate creeps up over time. This means your monthly payment can increase without notice.
How do you decide the best rate for your situation?
To help you choose the best rate for you, we spoke with Austin Weldon from Synergy Mortgage Group. Austin graduated from the University of Guelph Commerce program and has over five years of experience in the mortgage industry.
Here is what you need to know before you refinance your home:
With interest rates rising, what would you recommend, fixed or variable, and why?
Unfortunately, there is no cookie-cutter answer, and choosing the wrong plan can be very expensive. If you go to a bank, they’ll likely recommend the lowest rate because they want your business. If you want the best plan, not just the lowest interest, you have to consider your individual goals and plans.
These four questions will help you determine the best rate for your property:
1) Are you planning on staying in your home for the next five years?
If you can commit to five years without ending your term, a fixed rate might be the way to go.
2) Do you want to grow your family?
New family members might mean you need to move to a larger home. You may want a variable rate in case you need to get out of your mortgage early.
3) Do you have any major renovations coming up?
A fixed-term ensures that your rate isn’t going to suddenly change and make it more difficult to afford your monthly payment.
4) If you are doing major upgrades, do you want to recoup the money spent on renovations?
Then you might want a lower variable rate, along with the option to renegotiate without huge breakage penalties.
Choosing the best plan isn’t easy, but a licensed mortgage broker who focuses on the whole picture can help.
Want to know more about renovating vs upgrading your home? Check out some of our other articles:
- Should you renovate or buy a new home?
- Buying an older home? Here are the red flags to watch out for.
- Are solar contracts worth it?
How much would a variable rate have to increase to reach a fixed rate?
A variable rate is currently about 1.25% – 1.40% lower than a fixed term.
This is tempting to many buyers, but the biggest hurdle is uncertainty.
How much will your rate fluctuate over time?
Not as much as you think. The variable rate only changes when the Bank of Canada changes their Prime rate. This has only happened eleven times over ten years.
However, there are rumours of drastic changes to the Prime rate over the next 12 – 24 months, which has some buyers feeling unsettled.
Even so, there is no reason to panic. The Bank of Canada only changes the rate by 0.25% at a time.
It would take five to six increases before the variable rate catches up to the fixed rate.
It could happen, but it is unlikely.
Should you wait until your mortgage expires or should you refinance now?
Planning early is the smartest strategy. Why? Most lenders will hold your rate for 90 to 120 days. This could let you lock in a much lower amount than if you wait until the last minute.
Why are so many people refinancing their homes right now?
There are many reasons for a homeowner to consider refinancing.
1) Lower interest rates mean larger returns for investors.
This combination of soaring housing prices and low-interest rates is unprecedented. Investing is always risky, but I have seen some clients borrow at 1.5% – 3% and earn a return of 25 – 40%.
2) Refinancing is an easy way to access equity or consolidate debt.
If you have expensive repairs or a high-interest loan, it might be a good idea to roll it into your mortgage to lower your monthly payments.
3) The most common reason to refinance is to secure a lower interest rate.
If you went into a fixed rate before 2020, you can switch to a variable rate now that is much lower. This can decrease your monthly costs and improve your cash flow.
There are exceptional opportunities in the real estate market right now, and of course, those opportunities come with risk.
The smart thing to do is to speak to a licensed mortgage broker about your unique situation and your goals.
Should you be investing in real estate? Check out these resources below:
- Buying Real Estate vs Investing in Stocks
- Six best neighbourhoods in Guelph for Buying Investment Property
- The Best Types of Homes to Flip
