Thus far, Canadians having variable rate mortgages have benefitted from historically low interest rates. However, with the rates steadily going up, they will be required to come to a decision whether it is the right time to change over to a fixed rate mortgage.
Precisely speaking, Canadian homeowners with variable rate mortgages have actually been experiencing a windfall. This is primarily owing to the fact that ever since the global economic slump retarded all fiscal activities worldwide, the federal government introduced lowest ever mortgage rates with a view to keep the housing market in the country buoyant. Initially, the fall in interest rates was gradual, and finally they hit the rock bottom and have remained there for around a year now.
In fact, this has been boon for homeowners whose mortgage hovers with the interest rates. Thus, when the interest rates diminish; instead of the interest accrued, maximum percentage of their regular mortgage rates is utilized in reimbursing the principal of the loan. Therefore, there is little doubt that those having a variable mortgage or a variable mortgaged actually enjoyed a magnificent time during the last one year or so.
Unfortunately, the good times are now nearing end. Homeowners who had been having the pleasure to being attached to a plummeting mortgage rate are now set to go through a reverse - the reason being that the interest rates have again begun to go up.
It may be mentioned here that the interest rate paid by a homeowner on his or her mortgage is actually fixed by their respective bank. The banks fix the interest rate on the individual's mortgage on the basis of their prime rate that is established on the interest rate fixed by the Bank of Canada. Having maintained its innovative interest rate at a meager 0.25 per cent for nearly a year, now the Bank of Canada has declared that the current conditions were appropriate for hiking the historically low interest rate. In all probability, the rate will be raised sometime during the beginning of June.
Hence, if you too are among the Canadian homeowners with variable mortgages, it is high time that you ought to make a decision whether you should change over to a fixed rate mortgage.
As the name implies, a fixed rate mortgage denotes that the homeowner pays an unchanged interest rate for their entire term of his or her mortgage, irrespective of any change in the interest rate in the market. Even if the interest rate shoots up alarmingly, it will not affect the borrower and they will be protected, as their interest rate will remain the same. In fact, the advantage of having a fixed rate mortgage is that it offers a sense of security to the mortgagor, who is aware of the precise payments he or she will be making.
However, fixed rate mortgages have a downside too. In the event of the interest rate not rising much, you may eventually end up paying hundreds or even thousands of dollars more in terms of interest on your loan. This is primarily owing to the fact that in fixed rate mortgages, banks and financial institutions bear the risk of mounting interest rates and, hence, compared to variable mortgages, the interest rates for fixed rate mortgage are always more.
In fact, taking a decision on whether to change over from a variable mortgage to a fixed rate mortgage or not largely depends on your expertise in dealing with risks. Supposing you are the kind of person who will keep awake throughout the night agonizing over the way the interest rate of your variable mortgage is moving, it is always advisable that you go for a fixed rate interest. On the other hand, if you have enough money and enjoy a secure financial position that will enable you to manage your mortgage even when the interest rates are rising, you may perhaps wait a little more and watch the developments. You are always free to shift from a variable mortgage to a fixed rate mortgage if you find the interest rates shooting up drastically.
Another aspect that needs to be taken into account is the precise rate of interest of your mortgage currently. In fact, the interest rates for variable mortgages are fixed at one per cent lower or higher than the prime rate. In case you signed the mortgage agreement prior to the bottom falling out of the credit market, it is likely that your mortgage rate has been fixed at a percentage lower the prime rate. For instance, your interest rate will be calculated as: the prime rate (2.5 per cent) less 0.5 per cent for two per cent. Thus, whatever you will be getting at present will be 'prime plus'.
If you go by tradition, you will find that homeowners with variable mortgages have usually had better luck compared to homeowners with fixed rate mortgages. During the last three decades, there were only two instances when people who secured themselves with fixed rate mortgages have done better. And in both the instances it has been just prior to a hike in the interest rates.
All said and done, there is no one with a crystal ball to make exact predictions regarding the extent to which the interest rates will go up. Hence, for the majority of the homeowners it would be worthwhile if they explore the type of fixed rate mortgage they would be entitled to as well as the amount they would be required to pay as fees for a change over from a variable mortgage to a fixed rate mortgage. Once you are sure of these two vital aspects of shifting from a variable mortgage to a fixed rate mortgage, it will be easier for you to take a decision on the subject.