It’s official – interest rates on mortgages are going up. CIBC and TD will see their rates rise by the end of this year and again by the end of next year. And Royal Bank was the latest chartered bank to announce increases to their rates.
This begs the question as to whether now is a good time to be proactive and lock in your mortgage rate now to avoid higher rates in the years to come. This question is especially relevant if you’re among the nearly half of Canadian homeowners whose mortgage will be up for renewal this year.
The answer however is not so straightforward.
Let’s take a look at some of the factors you will need to consider:
Variable Rate Mortgages
Approximately 30% of Canadians have variable rate mortgages. This means the interest rate will rise and fall with the market. If you have a variable rate mortgage, you likely have the option to lock it into a fixed rate at certain points during the term. Switching from a variable rate to a fixed rate can give you a sense of security but keep in mind that your fixed rate is likely to be quite a bit higher than the variable rate you are paying now.
Additionally, you should know that by changing from a variable rate to a fixed rate with the same lender, you will likely pay a higher fixed rate than you would with a new lender. That’s because your current lender has less of an incentive to offer a more competitive rate since you are already a customer.
The bigger the spread between variable rates and fixed rates, the less reason homeowners have to switch. You will also have less reason to switch if your mortgage is relatively small compared to your income or if you have a shorter amount of time left on your amortization.
Finally, if you do decide to lock your variable rate to a fixed one, you need to know that there will be higher penalties if you choose to break your mortgage early because of refinancing or selling.
Fixed Rate Mortgages
Fixed rate mortgages are held by more than 65% of Canadian homeowners. If you are concerned about having to renew at a higher rate, you may be considering breaking your current mortgage now in order to renew early. To determine if this makes sense for you, you need to compare the cost of switching plus the penalty you would pay for breaking your mortgage to the amount of interest you would save by switching now.
Blend and Extend
Some mortgages let you renew your mortgage early without actually breaking it. An option called blend and extend can let you renew your term while getting a blend of your current mortgage rate and the rate that you would have gotten had you waited until the end of your term.
This may be a good option to give you peace of mind. Just remember though, that it doesn’t guarantee you will get a better rate than shopping around at the end of your term.
Knowing whether to break your mortgage early to renew – and when to do it – can be extremely tricky. Advice from a professional mortgage advisor can save your thousands of dollars in interest. To learn more, contact me today at 905-321-9396.