Are You Ready For Lower Rates?

As expected, rates are starting to trend in a downward direction. This might make life easier for some homeowners. But for others, lower rates might lead to more questions than answers. What should I do next? How can I benefit? Should I get a variable rate and ride the wave? Or should I stick with fixed?

There are no easy answers – but here’s some info that might point you in the right direction.

The Current Landscape

Rates are down by around 0.40% from their high just one month ago. This is a nice reduction, and good news: it’s only the beginning. Rates are expected to drop much, much lower over the next couple of years. If you want to take advantage, a variable rate mortgage is the way to go. 

Many brokers spent the last year recommending short term fixed rate mortgages. But now that rates are dropping, the only mortgage products that stand to benefit are variable rate mortgages. Fixed rate mortgages are priced based on the 5-year bond yield. It’s variable rate mortgages that will make borrowing costs much more manageable much quicker.

With that said, the pricing on variable rate mortgages has been poor. Prime less 0.60% is what I like to see. Anything less isn’t as advantageous. You may be able to find better in some circumstances, but the average right now sits at around Prime less 0.40%. Not the most competitive pricing I’ve seen.

So What Should I Do?

Everyone’s situation is different, but here’s a rough guide based on when you’re due to renew.

Your mortgage is up for renewal in 4 months or less:

If you can get a good variable rate, take it. This one is a no brainer. Rates will drop many times over the next few years and you’ll stand to benefit every time they do. Then, if you want to lock into a fixed rate down the road, you’ll always have that option. Many variable rate mortgage products will let you do this with no cost or penalty.

Your mortgage is up for renewal in more than 4 months:

I recommend waiting. No need to break and have to pay a penalty – this can be incredibly costly. Take a 1-year or 2-year fixed rate mortgage and wait until we start to see better pricing for variable rate mortgages.

Keep These Things In Mind

Things change quickly in a rate environment like the one we’re in. Make sure you work with a lender that allows you to benefit from a rate cut right up until 2 weeks prior to your closing date. This could save you a ton of money.

Also, make sure you keep an eye out for secret, heavily discounted rates. Sometimes called “whisper” rates, these non-advertised specials are reserved for high-performing mortgage brokers who qualify. Working with a broker who has access to these rates can be a gamechanger.

Finally, rates are volatile. Make sure you’re on high alert. Things can change in a heartbeat, so keep your eye on the news. Factors like increased government spending can heighten inflation and reverse rate cuts – so you’ve gotta stay on your toes. Now, more than ever, it’s important to trust the experts when making financial decisions that could affect the rest of your life.

Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.

Steve Garganis: 416-224-0114; steve@canadamortgagenews.ca