Don’t Switch to Fixed Rate Mortgage Before Reading This!
All the major banks in United States have increased their prime lending rates after the recent interest rate hike by the Federal Reserve and homeowners are being urged to lock in their mortgages before the Fed strikes with yet another hike in a week.
Rising Interest Rates
The recent increase in interest rates by the Central Bank has pushed up the monthly payments for homeowners with variable rate mortgages. So far, the Federal Reserve has hiked the interest rate four times in a year and economists are predicting another raise in key interest rate next week. If the prediction comes true, switching from a variable rate to fixed rate mortgage could actually be a money-saving move for homeowners.
Financial Planner Scott Evans from BlueShore Financial says that to know which mortgage option is right for you, it’s important to ask yourself why you chose the variable rate in the first place, and whether you still want to stick to your decision after the rising interest rates.
Most people with variable interest rate mortgage chose the option either because the interest rate was low at the time of applying for the loan or they anticipated a decrease in the rate in the future which could potentially bring down the monthly payments.
Cost Effectiveness of Variable Rate Mortgage
Since July, 2017, the Central Bank has increased the interest rate four times, taking it from a single percentage point to 1.5 per cent. Following the bank’s moves, other big lenders have also bumped up their prime lending rates, which has had a serious impact on homeowners with variable-rate mortgages.
Evens says that it might have made sense in the past to apply for variable rate mortgages because interest rates have been low for a really long time, but with four interest rate hikes in just under 12 months, variable rate options aren’t as cost-effective as they used to be.
The higher the interest rates go, the more you’ll have to pay towards the loan interest instead of the actual principal. If the rising interest rate is something that is keeping you up at night, then it might be time to actually do something about it, Evens adds.
Certainty of Fixed Rate Mortgage
In September, the housing industry starting showing signs of weakness as prices went down and the number of mortgages decreased by 3.4 per cent. Apparently, the increasing cost of borrowing is keeping young buyers out of the market – but the frequent rake hikes are only making the conditions worse.
Bank of Montreal’s VP, Omar Abouzaher, said that he often advises customers to choose fixed-rate mortgage over variable one because of the extra certainly it gives over the course of the loan. If you applied for variable-rate mortgage in the past but aren’t sure if that’s the right decision given today’s rising interest rate environment, check with your bank if they can offer other options.
Abouzaher says that it may be a good idea to switch to fixed rate mortgage because knowing what interest rate you’ll have to pay over the term of the loan can give you a peace of mind, and you’re less likely to be subjected to surprises or fluctuations.
Downsides of Fixed-Rate Mortgage
Of course, there are certain down sides to switching to a fixed-rate mortgage. For one, you will have to pay a slightly higher rate than you would pay with a variable-rate mortgage but this move may play in your favor if the interest rates continue to rise in the future. However, the tables can turn on you if the key interest rates retract, forcing you to pay more in interest now that you’re locked in a fixed rate.
Even if the interest rates drop after you’ve switched to a fixed-rate mortgage, the penalty of going back to the variable-rate option can often cancel out the savings benefit of paying less interest. But it’s difficult to predict which direction the interest rates will be headed in 5 or 10 years which is why you shouldn’t let the newspaper of the expert analysis influence your decision. Instead, choose the option that works best for your situation and your overall financial planning.
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