Should You Lock-In or Ride the Wave?

Interest rates have been a hot topic of conversation over the past eighteen months.

For buyers and homeowners coming up for renewal, even the die-hard variable supporters, have questioned, whether is it time to lock in.

Cheryl Jessamine, a Mortgage Professional with Advanced Mortgage, suggests it can be far more beneficial to focus on the actual payment rather than the interest rate. “What makes sense for your monthly budget is the right choice for you”.

With Economists predicting that variable rates will likely decline significantly this year, it may be something to keep in mind. “This could be as much as 1% in 2024”.

It is predicted the Bank of Canada will begin reducing the prime rate, which is currently at 7.2% by 0.25%, on April 10th. “Our fixed interest rates are tied to bonds which are a long-term investment. When bond yields go up, so do fixed rates. The opposite is true when bond rates go down. Bond yields are tied to inflation, if inflation is on the rise, so are bond yields”.

However, those with an adjustable variable rate will also benefit by seeing lower payments as the Prime Rate decreases. “An example of this is, for $100,000 of mortgage debt, a 0.25% rate drop will reduce your monthly payment by $14.90. Should we see the prime rate decline 1% over 2024, your monthly payment per $100,000 of mortgage debt will decrease by $58.70 per month”.

*Calculations are based on a 25-year amortization.

To make it a little easier, here are some considerations when deciding which rate and fixed-term options may be best for you.

  • Fixed rates are great as far as monthly budgeting goes. You will always know what your monthly mortgage expense is.
  • Variable-rate mortgages carry some risk, so if you are not good with fluctuating payments, this may not be the best option. However, if we do see a predicted 1% rate drop there is lots of potential to save money on interest costs.
  • 5-year terms offer the lowest fixed rate, but there is a risk that you might end up paying more in interest costs if fixed rates drop significantly.
  • 3-year terms are a safe bet by being locked in for a shorter period, should rates drop, the penalty for breaking the last year of the term is lower.
  • 2-year terms can be a good option; however, interest rates are higher than the 3- and 5-year terms.
  • 1-year terms can be riskier as there may not be enough time to realize the full potential of interest rate reductions. Should we experience another spike in inflation or some other world event, interest rates will increase again.

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Picture of Written by: <br>Marni Fedeyko
Written by:
Marni Fedeyko

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