Is it time to convert your variable rate to a fixed rate mortgage?

Bank of Canada announced yesterday that they will keep the overnight rate at 1.75%, meaning the prime rate will stay at 3.95%.

What’s going on with the prime rate?

This announcement came by surprise. A month and a half ago, most experts were expecting a reduction of 0.25% on the prime rate of 3.7%. Opinions were mixed as to why this did not happen. Some believed that the reduction would come on Oct. 30th and some experts argued that it depends on the election results. They claimed that if Trudeau was re-elected (which happened…), the bank of Canada would not touch the current rate, especially since it would be too late to affect the elections.

What should we do with the variable rate mortgage? And what about the penalty?

Many of my clients were waiting to hear Bank of Canada’s decision, as they were not sure whether to change their variable rate into a lower fixed rate; knowing that by doing so, they would lose the huge advantage of penalty option that is -1/5 (fifth) to 1/7 (one seventh) of the fixed rate penalty. This amount could easily come to $20,000 and more.
As you all know, rates are important, but we pay attention to the size of the penalty as a major player in saving costs for our clients. Although 95% of clients enter a 5year mortgage without any intention of breaking it during the term, 70% will end up doing so and pay a costly penalty due to the fixed rate they have taken. These statistics are not based only on our 2000+ clients but reflects the data that the lenders share with us.

Back to the above question: Is it the time to go fixed rate?

The conversion to fixed rate, will usually cost you nothing and can be done in one day. Also, fixed rates are rising as we speak, which motivates people to act. However, since the real cost is in the penalty, and not in the monthly payment or the rate, and since ~70% of us will PAY a penalty, it’s most important to judge case by case, and asses the chances and the risk of you paying penalty during the term.

Can we have it all? And still enjoy a great rate?

We are happy to share that we currently have some lenders that offer a fixed rate with a much lower penalty option. We do our best to secure new buyers with this type of mortgage as this way they enjoy the best of both worlds. As for existing mortgage holders, who would like to switch their variable rate mortgage to a fixed rate mortgage with a lender that offers a reduced penalty option, we would love to do the math for you and see if this step gets you where you want to be.

Here again: a very simple question about rates gets a complex answer that has different implications for different applicants.