Time To Lock In Your Mortgage, Experts Say

Excerpted from the Toronto Star- Moneyville
Time to lock in your mortgage, experts say.

John and Christina Boggan, in the home they just sold, bought a century-old home in Markham with a 10-year fixed mortgage at 3.99 per cent. Do you think it's a good time to lock in your mortgage?

By Madhavi Acharya-Tom Yew | Thu Apr 12 2012

Christina and John Boggan are moving from their current home, built in the 1960s, into a stunning century-old home in Markham. They couldn’t resist the 12-foot ceilings and sense of history the heritage home offers.

In the process, they will also move from a variable-rate mortgage to a 10-year fixed term. They couldn’t resist the security and peace of mind for their household budget.

“We got a home that we want to live in for a really long time. It’s our dream home. It made sense for us to lock in for a longer period of time knowing what our payments would be,” Christina says.

The Boggans aren’t the only ones making this decision. Record-low rates for five- and 10-year, fixed-rate mortgages, along with worries about rising interest rates, are prompting Canadians to review the payment terms on their homes.

A recent poll commissioned by the Canadian Imperial Bank of Commerce found that half of Canadians would choose a fixed-rate mortgage today, compared to only 39 per cent last year.

A full 86 per cent of those surveyed believe mortgage rates will either stay the same or be higher 12 months from now.

That’s a huge shift from the past five years, when Canadians who stuck to variable rates saved thousands of dollars in interest, as the prime rate moved down from 6 to 3 per cent.

Over that time, the Bank of Canada slashed interest rates to spur the economy during the 2008 financial crisis and the painful recession that followed.

Fixed-rate mortgages carry the same interest rate for the entire length of the term. A variable-rate product, on the other hand, fluctuates in relation to the prime rate (the rate the bank reserves for its best customers.)

Speaking of interest rates, that’s why many Canadians are leaping to lock in fixed rates.

It makes sense when rates are rising. Those with variable rates will either see their monthly payments increase or a greater portion of their payment go to interest, and a shrinking portion to the principal (it depends which product you have), while those basking in the certainty of fixed rates will be unaffected.

But it’s worth remembering that interest rates have already been far lower for far longer than anyone imagined. The Bank of Canada first began warning it would begin hiking rates in 2010. It has kept them low to support the economy, as the recovery in the U.S. failed to gain traction.

Even now, many economists say it will take until late 2012 or early 2013 for interest rates to actually start going up.

That has some people asking, is it really the right time to lock in, or is it possible that variable rates will hold a little extra interest savings for awhile longer?

Experts say the answer isn’t that simple. It depends on your household budget, your debt level, and your appetite for risk.

“It really comes down to a review of your own financial picture and your comfort level,” says Colette Delaney, executive vice-president of mortgage, lending, insurance and deposit products at CIBC.

“It depends on how you’re feeling about life and what sort of potential risk tolerance you have if rates go up.”

Next to actually finding a home, choosing your mortgage is arguably the most important decision you will face. After all, this is the biggest asset most of us will ever own — and the biggest loan we ever take out.

Think of it this way: the true cost of your home will ultimately depend on how much you pay for the money you borrow to buy it.

First-time homebuyers — often young families whose budgets are scrunched by debt and day-care costs — typically opt for a fixed-rate mortgage so any rate increase won’t blow a hole in their monthly cash flow.

First-time buyers, in particular, should ask themselves, “How can I get my mortgage payment to fit into my life, and not fit my life to the mortgage payment,” Delaney says. “That means taking all your goals and priorities into account.”

But seasoned buyers, and those who are farther along in their mortgage payments, are often more comfortable coasting on variable rates. Because they tend to have more savings, they have a bit of a cushion if rates go up.

The main case for locking-in now is it’s unlikely that fixed rates will remain this low in the coming years. Rates will move up as the economy gets moving again.

As well, banks and financial institutions have been locked in fierce competition for a shrinking pool of homebuyers in what is expected to be a slowing real-estate market. The competition is hurting their margins, however, and mortgage brokers warn it won’t last.

Paula Roberts, a mortgage broker with the Roberts Group-Dominion Lending Centre, says today’s five- and 10-year fixed rates are the lowest she has seen in more than 20 years.

“The strategy of people going year to year over the last 10 years has probably worked, but I don’t know if it will be the same in the next 10 years,” Roberts says. “People like to know that their income will go up and their payments won’t change.”

On the downside, you’ll be paying a higher interest rate right away in exchange for locking in. You’re making a bet that the big savings will come after five years or so.

If you already have a variable-rate mortgage that’s prime minus 70 basis points or better (that’s 0.7 of a percentage point), stick with it, if your finances are stable, says Robert McLister, editor of Canadian Mortgage Trends.

But today’s variable rates may only offer a discount of 10 or 15 basis points to the prime rate, which isn’t far off the three- and five-year fixed rates.

“Is that enough potential reward to justify the risk?” McLister says. “In my opinion, the answer for most people is no.”

That means most homebuyers would now be better off taking a fixed-rate. If you do opt for variable, keep a close eye on where interest rates are heading.

“You have to watch the market and ask a lot of questions,” Roberts says. She also recommends taking a variable rate mortgage that has an option to lock in.

The Boggans know there are lower rates out there for shorter terms, and that it will be years before they know whether they made the right choice on their mortgage.

But Christina says they are still pleased with their ING Direct mortgage, which carries a 3.99-per-cent rate for a 10-year fixed term.

“We just saw gas prices go up 4 cents a litre overnight. You never know what other costs are going to up. Cash flow is important to us in the next 10 years,” she says, adding that post-secondary education costs for their 13-year-old daughter were also a factor in their decision.

“It’s nice to know exactly what our payment will be for the next 10 years. We don’t want to be cash strapped and we want to be able to go on trips and enjoy life beyond the walls of the house.”