Three Ways To Protect Yourself Against Interest Rate Increases
‘How low can you go?’ has been the mantra for interest rates for years since the start of the pandemic. However, when there is a chance of a possible interest rate increase to the prime lending rate, it is common to wonder whether now is the time to convert your variable interest rate and lock into a fixed rate. However, before deciding to lock in, there are three options you should consider that may better address your concerns and allow you to keep the savings you’re receiving from the variable. As an expert in the field, I, Cody Rowe, want you to be able to make a sound decision by equipping yourself with expert information and knowledge. Read on to find out your options.
1. Use your prepayments to match the fixed rate
You will most likely have prepayment options that allow you to increase your payment or make extra lump-sum payments. If you are concerned about the possibility of a rate increase down the line, you can use this feature to increase your payment to what the future rate would be upon this increase. This will ensure your mortgage stays on track and keeps up with your end-of-term balance. Importantly, this will also remove any shock of an involuntary increased payment if the rate does jump up, as you will have already prepared for this and increased the payment on your own. Furthermore, using this same strategy, you can take it one step further and match your payment to what the current five-year fixed-rate payment would be (currently about 1% higher than the current variable) and pay your mortgage down aggressively while mimicking the payment of a fixed rate. If your variable rate goes up, it won’t be by more than 0.25% at a time, so based on this, you would need to see five rate increases – a very unlikely situation over a short period of time – before your rate is higher than the current fixed rate.
2. Go with a lender who offers fixed payments with their variable rate
Did you know that there are two types of variable interest rates? And one of those options allows you to lock in your payment for the entire five-year term. If there is a rate increase, all that happens is more of that current payment goes to interest instead of principal. Suppose you originally chose or are thinking of choosing the variable over the fixed rate because of the lower payment. In that case, this is a simple solution that addresses the concern of affordability or the worry of your payment increasing with the rate change.
3. Consider taking a three year fixed term instead of a five year
If, after considering the two options above, you are still on the fence about whether to choose a fixed rate, you may want to consider the idea of taking a three-year term instead of a five year. The first reason is that the penalty calculation for a three-year term is drastically mitigated compared to the five-year. If you have read my previous blogs, you will know that the biggest risk with a fixed rate is the penalty you are charged with, as over 60% of five-year fixed mortgages get broken before they mature, incurring a penalty equivalent to four and a half times the current balance. As it usually is broken around the three-year mark, this will mitigate the biggest concern that comes with choosing a fixed rate. Additionally, in a rate-rising environment, lenders will give better rates for the three-year term and will charge a premium to lock in for an extra two years.
If you are still uncertain of what the right decision is for your situation, or you are looking for a mortgage broker in Victoria, BC, then reach out to me. I have spent the last ten years in sales, banking, and operating several entrepreneurial ventures. My business experience and wealth of knowledge in mortgage finance give me the knowledge to provide my clients with creative financing solutions and full-picture credit solutions. With my expertise, I can identify your needs and your short-term and long-term goals while keeping your best interest at heart. My services include first-time home buyers, renewals, refinancing, reverse mortgages, private lending, commercial mortgages, construction financing, self-employed mortgage, investment properties, new to canada mortgage, etc. I serve clients across Comox, Vancouver, Campbell River, Victoria, Mill Bay, Cobble, Hill, Duncan and Nanaimo, and British Columbia. For a complete list of my services, please click here. If you have any questions about mortgages, I would love to hear from you. Please contact me here.