I'm sure you have heard for the first time in 7 years the Bank of Canada has increased their prime lending rate, which in turn is passed along by lenders to those consumers with loans and lines of credit connected to prime rate. My phone was ringing off the hook as those with variable rate mortgages are faced with a payment increase, many for the first time. Let's take a look at what we know and how you should decide what is the best fit for you.

Historically Variable Mortgages Have Saved Borrowers Money

We know that historically Canadian borrowers have saved money in a variable rate versus fixed rate over the life of their mortgage. The last part is the key. Over one term they may not, but over time they typically do.

The foremost research on this topic was done by York University's Dr. Moshe Milevsky in 2001 and updated again in this article in 2008:

http://www.advisor.ca/images/other/ae/ae_0208_mortgages.pdf

Based on data from 1950 to 2007, he concluded the average Canadian could expect to save interest 90.1% of the time by choosing a variable rate mortgage instead of a fixed. That said, even with these results he did not see a variable rate mortgage as a fit for everyone.

Will It Continue to Rise?

A month ago the answer to this was different. The majority of analysts were predicting a rate increase later this year. Now, there is a growing chorus of those that expect yet more increases this year, and more to come next year. It won't happen over night, but the trend on rates has changed. The challenge is, no one really knows when they will increase or how they will go until we get there. The Bank of Canada makes these decisions 8 times a year based on a number of economic indicators, and those change continuously. So will they continue to rise? The expectation is they will gradually rise as long as our economy continues to show the same strength.

Who Should Lock In?

Here is my take on those who should lock in:

• Payment Sensitive - If you feel a fluctuation in payment would put you into a financially uncomfortable position, then the predictability of payment with a fixed mortgage is probably a better fit for you.

• The Worrier - If your stomach is in knots 8 times a year leading up to the Bank of Canada announcement dates, you troll papers daily on signals of what is coming, or lose sleep over a higher mortgage payment, get out of your variable. There is an aspect of risk to a variable and if you do not have the stomach for it, life is much too short to worry about it.

• Those With Deep Roots - One of the benefits of a variable is the lower penalty to exit versus a fixed rate mortgage. It is an important quality to remember if there is a chance you could move, refinance, sell, or downsize within your mortgage term. Rate savings are important, but breakage penalties can be hefty and are also a big consideration.

• Big Mortgage With No Fallback - The higher the mortgage balance, the more impact interest changes will have. If you have a large mortgage now with few investments outside of your mortgage, you are more vulnerable to a swing in interest rates.

How Do I Lock In?

If you are in a variable rate mortgage, most lenders will allow you to switch to a fixed rate at least as long as the time you have left in your current term. Get your lender to confirm that they will allow this and have them quote you on what the rate would be. Then call me. The breakage penalty on a variable is quite low, so if you have decided to lock in, you may actually save money by paying the penalty and going elsewhere if your current lender is not offering a competitive rate. You could also choose to take a longer term if you want payment predictability for longer.

There is no "one answer for everyone" on this topic. If you are in a variable and concerned about how increasing rates may impact you, please reach out today.