Kofsky Mortgage

Mortgage Rates and Changes

Happy New Year! What’s going on in mortgages and rates…

There is some news floating around at the end of last year (2021) and the start of the new year (2022) that mortgage rates are on the rise. This is true! Fixed rates are currently rising due to the rising 5-year bond yield.

Got A Fixed Rate

Those of you that currently have a fixed rate, have nothing to think about as your mortgage rate is ‘locked in’. 

Currently Shopping

For those of you that are currently shopping for a home, the rising interest rates are something to think about. Overall, though a change in interest rates from say 2.74% to 3.10% (30 yr amortization) is a very minor increase in the grand scheme of things. 

As mentioned previously, the mortgage rate is a piece of the mortgage home financing puzzle but it is not the most important. Terms, conditions, penalties, options and flexibility are far more imperative to consider when entering into a 30-year loan. 

Consider it this way… a 2.74% mortgage rate on a 500,000 loan and 30-year amortization loan carries a monthly payment of approximately $2,034 and in comparison the same scenario as above but the interest rate is 3.10% has an approximate monthly payment of $2,129. That’s a difference of only $94 per month. While that does impact your monthly cash flow (no question), it isn’t an enormous difference when looking at the total years of a 30-year loan. Is the $94 monthly difference enough to justify potentially an enormous overpayment on a new home? To me, it’s not but everyone is different. 

Got A Variable Rate

The other side of this conversation is those with variable-rate mortgages. A common question I am hearing is ‘should I switch to a fixed-rate mortgage now?‘, that is a good question and the answer is entirely up to you and your comfort level.

Consider before making your final decision, many many real estate experts (realtors, mortgage brokers, specialists, lawyers, economists etc) choose to have a variable rate mortgage and stick with it because variable-rate mortgages have shown that they outperform fixed-rate mortgages over the course of your mortgage.

For more details check out this 2020 article about a study done at York University showing that variable rates outperform fixed rates by 88%. 

Furthermore, real estate experts also know that usually fixed-rate penalties (in comparison to a variable rate) are extreme and if you choose to break your mortgage for any reason, there is the potential of a $10,000 – $20,000 penalty OR MORE.

There have been news reports with the headline-grabbing sensationalism of the Bank of Canada may raise their overnight rate by 500%. This does not mean that your monthly payments of $2,000 increase 500% to $12,000 so let’s take a step back and review from another angle. The current overnight rate is 0.25% and a 500% increase is 1% so the 0.25% becomes 1.25%. 

What does that mean? Consider if you have a variable rate of Prime (2.45%) – 1% = 1.45% (Net). This means your rate increases from 1.45% to 2.70%. This is not a huge jump, Especially considering 1.45% or lower is historically low and the general average for mortgage rates is 2.99%.

A Better Strategy

A better strategy for those with variable rates is to receive the variable rate of 1.45% and then pay the fixed payment of 2.70%. 

So let’s consider a scenario of a $500,000 mortgage on a 30-year amortization. If the variable rate of 1.45% provides a monthly payment of $1,712 and the fixed rate of 2.70% has a monthly rate of $2,024, then if you choose to keep the variable rate but choose to pay the $2,024 that is an additional $312 going directly to your principal and due to the nature of compounding interest you are saving money.

If the rate goes up from 1.45% to 1.70%, does that matter if you keep putting down 2.70% payments per month? You are still saving a tremendous amount of money if you use this strategy even if the rate goes up. 

Let’s take it one more step further and say the variable rate goes to 2.95%… does this make you lose? No! You now just have two options. Option one, if you have been using this strategy all along, you are just minorly paying back the compound savings that you have been earning all along. Option two, if you can change your payments as the variable rate rises or lowers, your compounded savings remain consistent anyway.

As I mentioned previously do not feel overwhelmed by the sensational news grabbing headlines, just take a moment and review the facts and discover what works best for you. If you decide to switch to fixed because it will be better for you and your family, then do it or if you are comfortable with the risk of rising rates and have a strategy in place then perhaps variable is still right for you. It is 100% up to you.
Happy to Help
If this seems a bit overwhelming and you want to talk it over with someone, you are more than welcome to reach out to me anytime. I am happy to consult and help you make sense of the ever-evolving real estate market. 

Feel free to reach out anytime, my phone number is 604-202-9913