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Rising Interest Rate & Your Mortgage
Since the summer of 2017 we have seen Prime Rate increased five times by a total of 1.25%. At the same time, five-year fixed-rate mortgage rates have also risen by approximately 1.65% to hover at about 4%. The economic consensus is the Bank of Canada has two more rate increases over the next year. Several economists are calling for interest rates to settle or even decrease starting in 2020. If this is all true, we might expect to see the Prime Rate peak at 4.4%. In other words, most of the increases have already happened.
If You Are In a Variable Rate Mortgage Today
Do you convert your mortgage to a fixed rate mortgage or do you stand pat and ride it out? If you have a variable mortgage today where the rate is around 2.9% do not convert. If you convert, it might go up to somewhere between 3.8 and 4%. The very thing you are trying to protect against you just made happen! Remember, In my previous post Fixed vs. Variable I suggested that you set your repayment based on the fixed rate amount. Up to now, you have only given back the money you earned or saved.
If You Are Buying a Home Today
For many years, the smart money always chose a variable rate mortgage. Over any given five year term, homeowners paid less interest than their conservative ones who chose a fixed rate mortgage. But that was in an environment where interest rates were dropping or holding. Now the rate trend is upwards. How long is this trend going to remain in place? You must keep in mind that the prepayment penalties on fixed-rate mortgages are much higher than those of variable rate mortgages. It’s important to choose your lender wisely and review your short-term goals. It’s possible, and very likely, that you may need to break your mortgage mid-term and costing you thousands..