Rates have already risen since December 2021 and are continuing to rise. Market experts are predicting rates rising up to between 3.40% and 4% by the end of 2022.
We all fear paying more interest, but if recent history is anything to go by, most Canadians with still come out ahead of their fixed and/or variable-rate mortage rates despite The Bank’s pattern of raising rates.
Canadians with variable-rate mortgages may be feeling more concerned than their fixed-rate counterparts at this time, so let’s look at some strategies to assuage some fears and lessen the rate-hike’s impact.
How do you best manage the coming rise in interest rates?
1) Roll with the punches
First, like any boxer willing to go the distance, be prepared to roll with the punches! By taking the variable-rate approach, you have chosen a “rocky” path that seems rough at times but generally pays off ahead of fixed-rates. Although there are times when this hasn’t always been the case, the trend remains that in the Bank of Canada’s last four rate-hikes, it has raised interest rates by approximately 144 points. Forecasters see the Bank of Canada hiking rates as many as five times by the end of 2022 (or 125 basis points). Taking into account the current average between fixed and variable rates, the worst case scenario is that you will break even.
2) Consider switching to a fixed rate
Second, consider switching to the fixed rate. If the “southpaw” variable-rate streategy is causing stress, it may be worth your peace of mind to switch over to a more “orthodox” fixed rate before the hikes begin. No one can know for certain when interest rates will move; and let’s not forget that fixed rates have also been increasing for a over a year now. In an attempt to feel more secure with your new fixed rate, the premium you may have to pay could, instead, simply start wearing down any savings you had expected to make. Talk to your expert advisor before making any flashy moves and make certain your penalty prepayment for switching won’t end up being higher than simply staying put. Do your research!
3) Prepay your mortgage as a hedge
Third, and finally, only use the aforementioned prepayments as a hedge. If you honestly see yourself as a “rate-hike Rocky” who is willing to take on all comers, and go the distance if necessary, then the variable rate is for you. Don’t forget, these prepayments are added to your regular mortgage payment schedule and are applied directly to your principal. Perhaps, use fixed rates as nothing more than a gauge and pay as though you were on a higher fixed-rate mortgage. This way, you could speed through your principal repayments.
Whichever plan you choose, make sure to get qualified advice from a trusted expert. Decisions are easier to make when you know you have a good coach in your corner.