Should You Lock Your Mortgage Rate?

If you have ever been to Montreal on a hockey night, you probably thought that we, Canadiens’ fans, are crazy about our team. (and they won 5-1 yesterday… Finally!) Should you pick up any newspaper between September and May, you will find at least 1 article about our hockey team (and when they win, they are on the front page… come to think of it, same thing happens when they lose as well!). Well, I feel that people in North America want to read about finance as much as Montreal Canadiens’ fans want to hear about their favourite team! Everyday, there is something to say about the economy. Since the 2008 market crunch everybody has their take on what is going to happen next. It has created a huge point of interest.

A few weeks back, the Bank of Australia raised their daily interest rate for the first time since the beginning of the crisis back in 2008. Even though, it was a small increase, it was enough to put several financial journalists and financial analysts in their seats to write some forecasts on their laptops (it’s funny to think that they don’t need to find a financial topic to write about… they are given by the 6pm news ). Now we are told that we should consider locking in our mortgage rates.

So, we are now getting everybody’s opinion on interest rates in Canada. About 2 months ago, everybody said that the variable interest rates would remain as is until mid 2010. I even read economic reports showing forecasts of low interest rates until 2011! But now that the Australian Bank raised their interest rate, some people are ready to throw-in the towel scream from the rooftops that we need to lock-in our mortgage rates.

Interest rates don’t rise overnight

I don’t know if it’s because we are overloaded by information, or because the media business model is not very lucrative so they try to become more sensational, but I don’t see how interest rates could suddenly increase by 5%!

Instead of trying to predict the course of the interest rates, I will simply say that interest rates won’t rise that fast. There are 3 main reasons why the Bank of Canada won’t do it:

#1 It would push the Canadian Dollar past parity with the US dollar (something we know will hurt our economy)

#2 They have witnessed the impact of implementing violent moves with interest rates. For the past 10 years, the Bank of Canada is changing its rate slowly to avoid the crisis of 1981-82.

#3 Inflation is still near 0%, there is no need to crank up the interest rate.

So should you lock-in your mortgage rate?

We will all have someone around coming back with the stories of the high interest rate period of the 80’s and claim that we could see the prime rate at 7% in no time.

The thing is that you probably won’t pay your mortgage off over the next 5 years (if you will, then perhaps it’s a different game). And over the life of your mortgage (25 to 30 years), it has always been advantageous financially to keep a variable mortgage rate, (provided you can still sleep at night!)

You can probably lock in your mortgage rate for 5 years at 4.00% right now. However, if you stay with a variable rate, you are paying between 2.25 and 2.75%. So, worst case scenario: you are still paying 1.25% less than a 5 year fixed mortgage rate.

Therefore, if you are about to lock your mortgage rate at 4.00%, I have a prudent suggestion for you:

Calculate your payment at 4% and make this payment on your variable rate mortgage (that is currently much lower). You will then create a buffer and pay off your mortgage faster. You will protect yourself from a rate increase while benefiting from the lowest rate on the market.

image source: rds

• What Will Happen With Canadian Mortgage Rates in 2010?
• Is Variable Interest Rate Going Back up?
• Bank of Canada cutting its rate again by 0.5% – Canadian Economy on the slump
• Savings 2009 – The age of the fixed rate bond
• RRSP Contribution VS Lump Sum Payment on Mortgage

If you liked this articles, you might want to sign for my FULL RSS FEEDS. Then, you will get my daily post to your email and can read it at any time. To subscribe CLICK HERE

Comments