Interest rates are definitely trending up. Each of Canada’s 5 big banks announced a series of rate hikes last week. While there were some differences in the details of changes made by the banks to their mortgage rates, the announced hikes put all their five-year fixed closed rates at about 5.84 per cent. That seems high in relation to what we have seen in the past year however, the average rate if we exclude the early 80s, is about 5%.
How high can the rates go? Should you lock in a rate now or wait or stay variable? If you ask the bank, they will likely tell you to lock in because it is good for them but before you do, consider a few facts and research made on the subject.
One of Canada’s foremost authorities on personal finance. Dr. Moshe Milevsky, studied over fifty years of mortgage rate data (1950 to 2001). He concluded that anyone who locked in at a fixed interest rate paid more than they should have for their mortgage. During the above noted period, you would have been better off with a variable rate 88.6% of the time.
Does a variable rate mortgage still make sense? With interest rates expected to head north, the natural instinct is to lock in, but you may be better off over the longer term with a variable rate mortgage. Dr. Milevsky feels there is no “one-size-fits-all solution” to choosing a fixed or variable rate. He says it depends mainly one’s risk tolerance. Milevsky’s mortgage research is the best out there. He has shown time and again that regardless of what rates do in 1-2 year periods you are better off in a variable if you can handle the payment risk.
That is key, can you handle the payment risk? In a financial planning perspective, you need to assess your cash flow situation and personal circumstances. Locking in a rate may be better for some to provide peace of mind while for most, the variable option may be the less costly alternative.