Is it the right time to lock into today’s low rates? If you are currently in a variable rate mortgage it is likely very low with affordable payments. Fixed rates are also at an all time low with talks of an increase looming in the near future. A variable rate mortgage is currently just above the two per cent range and a five year fixed currently available at 2.59 to 2.69 per cent range. Your payment today is affordable however you have to ask yourself if the prime rate were to rise would your payment continue to be affordable?
A $300,000 mortgage at 2.2 per cent amortized over 25 years results in a monthly payment of $1299.49. If the prime rate were to increase by 1 per cent your new rate would be 3.2 per cent and that same monthly payment would increase to $1450.70. For many this may be a stretch and something to consider now before rates increase. Remember with a variable you will lock into the rates available and if you wait too long the low attractive five year fixed rates may no longer be available. It may make good sense to lock into a fixed rate mortgage at this point provided the monthly payments are affordable.
If you are looking to refinance a fixed rate mortgage that is at a slighty higher rate than what you currently have the decision becomes more challenging. Do you guarantee yourself a rate in the mid 2 per cent range for the next five years or take the chance that rates will be decent when your mortgage comes up for renewal? If you are in a fixed rate mortgage you will most likely incur a penalty for paying off your current mortgage. This penalty will be one of two determined by your lender. You may pay a three month interest penalty or an IRD (interest rate differential) which is the difference between your original mortgage rate and the rate the lender can charge today.
IRD’s can be expensive so it is crucial that you work with a professional who can do the correct calculations and confirm it is in your best interest to move forward. A professional will compare the interest rate of your current rate mortgage with the proposed new mortgage rate and determine whether the penalty makes sense for you. If the interest payments you save are greater than the penalty for a mortgage of the same term the move is right for you. In the case of a refinance there may be legal fees but if you make no changes to your mortgage you can switch the mortgage and legal fees will be incurred by the lender you are moving to.
It certainly does appear that rates are poised to rise within the next 12 months. Should you take the sure thing and lock in at a low five year fixed rate mortgage at this point? Give us a call to discuss your options.
Of Prime Interest is a collaboration of mortgage professionals: Trish Balaberde: 250-470-8324 Christine Hawkins: 250-826-2001 Darwyn Sloat: 250-718-4117.
