I recently read an article that a colleague sent to me this morning from the Canadian Press about the Bank of Canada and interest rate policy. I am a believer that interest rates WILL move toward their historical average of 7% for the past 25 years. Why would it seem unreasonable to expect them to rise from today's rate?
I had a client who was comparing a variable rate of 2.25% to 3.99% fixed rate for 5 years, indicating that paying a lower rate makes more sense. However, paying a lower rate today DOES NOT guarantee that the rate will be this low forever. That's like saying that the stock market will rise forever!
The key to assessing whether to take variable depends on your risk tolerance. If you can afford to pay today's variable rate mortgage payment, then figure out if you could afford the payment at 4%, 5% and then 7% (the historical average). If you'd struggle once figuring these payments out, then you had better think twice before jumping on the variable rate bandwagon!
The banks are aggressively selling their variable rate mortgages (at premiums) to vulnerable clients, essentially setting them up for financial disaster! Some clients are even being talked into variable rates on the premise that they can "lock in" later on. Well, the fact remains that fixed rate mortgages are tied to the bond market which trades daily. By the time a client realizes that they need to lock in, the fixed rates on mortgages will have risen by that time. Unless one has access to a crystal ball, you will almost always miss the lowest fixed rates!
Take the time to have in depth discussions with your banker or broker. Ultimately, the decision comes down to risk tolerance, and a professional will help you answer and forecast the impact of difference scenarios.
Thanks for reading!
Your London, Ontario Mortgage Brokers at Dominion Lending Centres Forest City Funding FSCO# 10671