When to Lock Into a Mortgage Rate in Winnipeg
October 23, 2018 | Posted by: Ron Chan
Given that since the summer of 2017, the Bank of Canada has increased interest rates four times, many prospective buyers in Winnipeg are wondering if they should lock into a mortgage rate. Fair question.
On the surface, it certainly seems to make sense, especially if the BoC trend continues to tick upwards. But as with anything, there is more to consider before making a decision.
5 Things You Need to Consider Before Locking Into a Mortgage Rate
1. Are You Risk Averse?
This question pops up a lot when it comes to getting a mortgage. For instance, it was posed recently in this article about whether or not homeowners should consider using equity in their home to make an alternative investment. And while it may seem less analytical than some of the other considerations below, it’s no less important. Simply put, variable mortgage rates work well for those with a higher risk tolerance. On the flip side, if that sort of uncertainly weighs heavy on you, adding to anxiety and stress, then a fixed rate may be the scenario you need to sleep well at night. And don’t worry if this is you, as about three-quarters of Canadians reportedly hold fixed rate mortgages - so you’re not alone.
2. The Penalty for Being Uncertain
If there is even an inkling that you may need to break a fixed rate mortgage, then you might be better off with a variable rate as the penalties than can come from breaking your locked in rate can be enormous.
In many cases, lenders impose a fixed mortgage penalty equivalent to a full annum of payments. However, when you break a variable mortgage, penalties are typically three-months.
What could cause you to break a locked in mortgage rate? A lot. All of the life changing events that can occur may occur, but you can do your best to predict them. For example, if your job or marriage is uncertain, being locked into a rate can leave you holding the proverbial bag. The same goes if there is a reasonable chance of a relocation that may necessitate selling your new home.
3. Your Other Debt
People get worked about about variable rates because of the potential fluctuations. However, what they may not realize, is that there are typically much greater fluctuations when it comes to the rest of the debt they carry. Spending habits can change monthly and this can have a direct impact on cash outflow on credit based interest. For instance, if you throw a big family vacation on your credit card, your monthly payments (based on the rate of interest) will shoot up until you pay it down. In the end, that pattern isn’t all that different from what can happen with a variable rate. In fact, “other debt” fluctuations are often much more variable than that of the same-named mortgage rate. People need to stop treating mortgage rates so differently from the other debt they carry. By making better decisions in the latter you will be in a much better position to accept fluctuations in the former, no matter what the Bank of Canada decides to do.
4. Your Other Expenses
Just like your other debt can be much more variable and costly than a variable mortgage rate in uncertain times, so can your other controllable expenses. For example, a rise in insurance premiums are often directly related to decisions, activities, and behaviors such as good or bad driving or healthy/unhealthy habits (etc.). Household utility expenditures can also fluctuate by hundreds of dollars per month depending upon how responsible your household is, or isn’t, in such a capacity. Of course, the same is true for disposable income spending (i.e. for leisure, etc). You may find that variable mortgage rate differences from period to period are nothing compared to the financials you do have direct power over. If you can tighten up the ship with your other expenses/spending you’ll be in a much better position to mitigate any risk you feel when it comes to variable mortgage rates.
Making smarter financial decisions elsewhere will also free up funds to allow you to pay down your mortgage faster, which can reduce the risk you face under the variable rate scenario.
5. You’re Financially Prepared
While this rule applies to getting any sort of mortgage, it can be especially true for those considering jumping into a locked scenario to capitalize on a relatively low fixed rate. Don’t make any rash decisions because of what the newspaper is telling you. Make a wise, calculated decision. If you’re about to accept a fixed rate, make sure your longterm financial picture is one that can accommodate the monthly payments. You know them (given the fixed rate) so you can do the math and determine the viability. As stated in item #2 above, there is a harsh penalty for breaking a fixed rate mortgage, so don’t accept one based on future expected income, base your ability to pay it on your current financial state of affairs. Otherwise, consider a variable rate which comes with a lesser penalty.
While the above provides some guidance on today’s subject, some uncertainty likely remains. That’s OK. That’s what I’m here for. As your mortgage broker with ties to preferred lenders (and rates) in the Winnipeg area, I will work closely with you to consider your financial picture together to find a solution that is customized to your explicit needs. Contact me today at 204-290-9950 to get the ball rolling.