Fixed vs Variable - Should I lock in my variable rate mortgage?

Simple answer. Nope. Glad we had this talk.

All joking aside, to answer that question I think we need to understand why you are even asking it.
Are you worried about your payment rising when the rates rise?

Are you worried you will pay too much in interest if you don’t lock in now?

Does the uncertainty just make you nervous?

If these are your questions, and the reason you are considering locking in your variable rate mortgage, hopefully by reading this, I can help answer them.

YOU ARE WORRIED ABOUT YOUR PAYMENT RISING.

I get it. You have been paying the same payment for a while now and the thought that it may go up worries you. We have been spoiled with these low rates for a long time, I know. It’s been great, but the truth is these are absurdly low rates that, to people who have been around for 20+ years, don’t even make sense. (Yes, Im referring to me). Rates are rising, but that’s ok.. If this is your worry though, think about what locking in the rate today will do. Let’s assume you owe $350,000 on your mortgage and your variable rate is PRIME (2.45%) Less 0.75%. This brings your NET rate to 1.7%.

A payment on this mortgage over 30 years is roughly $1240 per month. If Prime does in fact go up .25% and your rate rises the same, your interest rate is now 1.95% and your payment will increase to roughly $1283.00. A jump of only $43. Now, let’s look at what happens if you decide to lock in your variable with todays 5 year fixed rate. The average rate, as I write this, for a 5 year fixed is 2.99% (depending on several factors, so this is the average)

$350,000 @ 2.99% over 30 years = $1470 per month. An immediate increase, of $230.

If you are worried about your mortgage payment rising, why raise it $230 overnight? Why not let the payment rise gradually? Plus, locking in means if there is a correction again, and prime rate drops, you won’t benefit on your payment dropping. To me, it doesn’t make sense to raise your payment $230, just because you were worried about your payment rising. Say what now?

YOU ARE WORRIED YOU WILL PAY TOO MUCH INTEREST WHEN THE RATES RISE.

Fair enough. That is obviously a worry, and I understand. “What if rates go back to 18% like they were it the ’80’s”. Relax. Just like other priceless things the 80’s gave us like Big hair, spandex, and Milli Vanilli - those ain’t ever coming back. If you have a variable rate mortgage now, your rate likely starts with the number ‘1', however, eventually it has to rise. That doesn’t mean you should do your part to help your rate rise quicker. Let's use the examples above to illustrate the difference in interest rate. I’ll simply use 1 year examples to keep it easy. I’ll assume that BoC Prime rate jumps 3 times this year and stays put over the next year. If prime rate does in fact increase 3 times at .25% each time, your 1.7% will turn into 2.45%.

Understand too, that this is over the next 11 months and we aren’t even using the savings while the rate climbs during these months in this example. Only AFTER it jumps 3 times.

$350,000 @ 2.45% = $8575 in annual interest (yes of course, the loan gets paid down, but for this example we are showing simple numbers)

$350,000 @ 2.99% = $10465 in annual interest. A difference of $1890 in interest. And this does not include the money saved riding the rate increase from 1.7 to 2.45%. Even in the worst case scenario and the rates rose to a point where you are paying 3% now (Prime would be at 3.75% for that to happen) you are now dead even with the fixed rates of that you were planning on locking in to 2 years prior. For all we know it could be 3 years from now
Even worst, worst case scenario (ya, I know that’s not a thing) if your rate went to 3.25% or even 3.5% at some point, you aren’t losing. You are merely giving back some the savings you enjoyed while the rates took their time to rise over the 2,3,4 year period. By the time that happens, your term is likely nearing its end anyways. You are still good.

THE UNCERTAINTY MAKES YOU NERVOUS.

Well, this one is simple. Lock it in. If your reasons have nothing to do with the payment rising, or the amount of interest you will pay, and has more to do with losing sleep, causing you unneeded stress, or constantly obsessing over, then the variable was not right for you in the first place. If showing you the actual numbers does little to ease your anxiety over the mortgage, and you just don’t believe you can handle the ups and downs, lock it in. It's completely fine. “Some people just can’t handle the swings", and that’s ok. Your stress levels and health supersede any potential money savings. Sometimes it's not about the savings, or the rate but has more to do with peace of mind and payment structure. If that is the case, then you do you.

One thing to note as well, variable rate mortgages traditionally have much smaller penalties to break the contract than if you chose a fixed rate. Once you get out of the variable, you now will have to pay the penalty that comes with a fixed rate mortgage. That could be much higher should you need to break the mortgage for any reason.

So as you can see, it all depends on the “WHY”. Everyone has their own reasons for asking the question, but hopefully this helps you make your own decisions on what’s best for you.

Personally, the only time I can see it being advantageous to lock in your variable rate is if the fixed rates and the discounted variable rates are within 0.00-0.30% of each other and we expect further increases, I have 3 or less years remaining on my term and I can choose a 3 year or 2 year term, and if I ever needed to get out of my mortgage, I know my penalty wouldn’t be sky high. If those 3 things don’t all align, I generally wouldn’t worry about locking in.

Or here's an alternative. Almost like a hybrid. Some lenders allow you to fix your payment the entire term so you dont have to worry about your payment changing. You choose the variable rate, but you simply fix your payment to the same as the fixed rates today, and leave it alone. You will be charged the variable interest rate of 1.7% lets say, but you have fixed your payment to 3% as an example. The extra money you are paying will be pre-paying down your mortgage and you dont have to worry about your payment moving. This is a great tool. However, here's the rub. This usually needs to be done in the beginning when you first arrange the mortgage.

I hope this was able to ease your mind and answer that burning question that many of us face right now. If this was helpful, and you want more information regarding this topic, or any other mortgage related problem you may be facing, we’d love the opportunity to help.

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