Stop! Yes, banks’ primary lending rates have risen from 2.4% to 3.2% with the first two benchmark rate hikes this year. And yes, we will most likely see another rate hike from the Bank of Canada in June, and it could push the prime rate further, possibly to 3.7%. This all seems uncontrollable, unmanageable – and it will panic many.

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The truth is that banks are positioned to take advantage of these types of environments. They will tempt you with a free offer to switch from a variable rate to a fixed rate. They can offer you a five-year fixed-rate ‘deal’ of 3.99% that expires in a few days; if you don’t act fast enough, your rate will rise to 4.14%. They will try to convince you that rates will continue to rise until they reach the moon, and that it would be unwise to use a floating rate as we face a potential recession.

The fact is that the time to stick to a fixed rate is over, and the attractively low five-year fixed rates of 2.59% to 2.99% are long gone – the train has left the station. Most floating rate holders could get discounts of 1% to 1.25% or more below the top rate, but those discounts are no longer readily available on refinancing and conventional mortgage contracts. If you already have one of these rates, chances are you’ve got your hands on a dinosaur — it’s on the brink of extinction as lenders cut their discounts. In today’s market, you are more likely to get a floating rate in the range of prime minus 0.5% to prime minus 0.75%.

So, faced with this predicament, what should a floating rate mortgagee do? How can one prepare for the expected increase in rates in the next 12 to 18 months?

Coaching clients with variable rate mortgages has been what I have been doing for over two decades. I’m a proponent of the floating-rate product and its benefits, and over the years, thousands of my clients have saved tens of thousands of dollars in interest costs and have taken years off their amortization — the length of time they’ve had a mortgage. Many customers were initially terrified of going the variable route, due to the lingering myths about it. But over time, they have come to understand how variable rates can work in their favor.

Here are five things to consider before committing to a five-year fixed-rate mortgage in today’s environment:

1. Variable rates are still very competitive

If you take out a five-year fixed-rate mortgage in the 3.99% range today, you could end up paying nearly double what you would with your current variable rate. The promise of peace of mind from your friendly neighborhood bank representative sounds great after experiencing some Bank of Canada interest rate hikes, but chances are a floating rate client will only pay 1.95% to 2.2% after the recent hikes. Even with a few more raises, your floating rate will likely be well below the current five-year fixed rates.

2. We are far from pre-pandemic lending rates

In the month of March 2020, the Bank of Canada cut its benchmark interest rate three times due to COVID-19. We saw successive 0.5% declines on March 4, 16 and 27 – a total drop of 1.5% in one month – until the benchmark rate hit an all-time low of 0.25%. Even with recent increases, the Bank’s benchmark interest rate is still 0.75% lower than before the pandemic. By extension, the prime lending rate is also lower than before the crisis. The floating rate mortgage was a great option before the pandemic, and it still is today.

This post Now is not the time to switch to a fixed rate mortgage

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