With all the talk about the Bank of Canada increasing their rate in 2022, I’m getting more and more questions regarding converting a current variable rate mortgage into a fixed.
But is this a good idea?
For those who follow my blogs regularly, you’ll know that I’m always saying that there is no one size fits all mortgage advice, and everyone’s situation can be a bit different. This is stands true here as well.
As with any mortgage related decision, it comes down to what you feel most comfortable with. That being said, making a decision without the proper guidance can end up being costly. Many believe they’re experts when it comes to mortgages. You’ll get advice from your parents, your friends, your aunts, uncles, cousins, teachers, distant relatives, ‘the guy on the internet’, etc, etc, etc.
The question is, who do you listen to?
Everyone means well, however they can only advise based on their own situation, feelings, tolerance for risk, and beliefs about that they think will happen with the market moving forward. But what’s right for them might not be right for you.
When we hear about the possibility of the Bank of Canada going on a rate increasing rampage, it can be enough to scare anyone into locking in.
Will Rates Increase Sooner Than Expected?
The Bank of Canada is predicting that they will be increasing their rate sometime between April 13th and September 7th 2022 (the first and last of their scheduled rate announcements for the middle two quarters of next year).
But how likely is this to happen?
Our economy has been improving nicely, with strong employment and GDP growth. If this were to continue, then it’s possible that the BOC could move up their projected timeline and increase in the first quarter. The improving economy is great news overall, but bad news for rates.
Does this mean that we can expect an increase sooner than expected?
Anything is possible, but the new omicron COVID-19 variant creates a lot of uncertainty, which may force the Bank of Canada to alter their plans. At this stage, no one knows for sure. Even the Bank of Canada doesn’t know. It really depends on what happens with the omicron variant moving forward.
The next scheduled rate announcement from the Bank of Canada will be on January 26th. While it’s highly unlikely that we would see any movement on that date, it will be an interesting announcement nevertheless.
With the omicron variant is spreading, I would not be surprised if they pushed their expected rate increase out further. Time will tell of course.
What Happens If Your Variable Rate Rises Above Today’s 5 Year Fixed?
There are many who believe that their variable rate has to remain below their fixed rate alternatives throughout the entire term. In other words, if you’re currently in a variable rate mortgage at 1.00%, and you’re being offered 2.49% to convert into a fixed, then your variable would need to stay below the fixed rate for the remainder of the term.
There is nothing further from the truth.
In fact, your variable rate can climb substantially higher than your alternative fixed rate and you can still come out ahead. I explained this in detail in my October 27th blog. When your variable rate climbs up over the fixed rate alternative, you aren’t immediately losing. You’re just starting to give back some of your savings.
The Danger Of Locking In Too Early
Banks love it when people lock in early. Many tend to panic and may jump the gun at the first hint of a rate increase. This move can prove to be costly. Will the rate increase? Yes, it almost certainly will, and multiple times as well. We just have to be mentally and strategically prepared for the expected increases.
They Bank of Canada can’t move too quickly here, as it can take 12 – 24 months before they see the economic impact from each rate movement. The faster and more frequent their rate increases, the greater the chances are that they will need to respond with a cut.
It would be unprecedented for them to continue increasing the rate without any decreases along the way.
Only twice in history have we gone five years without seeing a single decrease, however there were also no increases along the way either. In fact, there are only two times in history where this has occurred:
1937 to 1944
1945 to 1955
There has never been a five year period where rates have increased, and not decreased at some point along the way, and there is no reason to believe that this is going to change.
Should You Convert Your Variable Rate Into a Fixed?
You could, but it’s kind of like saying to yourself that rather than waiting to see what happens, you would like to start paying the higher rate and increased payment right away.
Why wait for the increase?
Let’s pay more right away, starting with the next payment.
It almost sound ridiculous when put into that context, but that is exactly what you would be doing.
You could use the same logic when trying to decide between fixed and variable on a new mortgage. Over the past 40+ years, people have generally come out ahead with a variable rate mortgage.
Again, that doesn’t mean everyone should be choosing variable.
It really depends on the person. For more information on this, I would highly recommend reading The Ultimate Guide To Choosing Fixed or Variable. You will also want to check out my blog from the October 27th rate announcement where I give breakdowns on how multiple prime rate increases will affect you moving forward.
Conclusion
The right decision comes down to the way you feel and what you’re most comfortable with. If you think you’ll become flushed with anxiety watching the prime rate increase while you sit on the sidelines, then converting into a fixed rate would be worth considering. As I say in my book, the best decision is not the one that saves you the most money. It’s the one that allows you to sleep soundly at night.
