Fixed or variable? If you’re thinking about buying a home, it’s one of the most important decisions you’ll make. According to a recent poll conducted by CIBC, 50 percent of Canadian’s prefer to go with a fixed rate mortgage product – an increase of 39 percent over last year’s numbers. And while this isn’t surprising, given the convergence of fixed and variable rates over the past six months, it’s a telling sign of the times. More and more Canadians are locking in low, long term mortgage rates in anticipation of rate hikes from the Bank of Canada.
Reviewing the Numbers
A year ago, the five-year variable rate was the preferred choice for best rate mortgage hunters. Why? Because of the base point spread (BPS). In April of 2011, the spread in BPS was 172; fixed five-year rates were steady at 3.82 percent while five-year variable rates were 2.10 percent. Today, five-year fixed rates have dropped to 3.19 percent while five-year variable rates are holding steady at 2.85 percent, a BPS spread of just 34.
The shrinking spread, coupled with the threat of increasing interest rates, has mortgage customers feeling confident that fixed rate mortgages are the way to go. According to CIBC’s study, 18 percent of Canadians say they are uncertain which mortgage would be right for them, an improvement over last year’s stat of 30 percent.
And yet, a surprising 32 percent of mortgage customers said they’d choose a variable rate mortgage today – the same percentage as last year’s survey. Which leads us to our final question – are Canadian’s really up to speed on current rates, or are they simply staying the course with their current mortgage agreement?
How Do You Decide on a Rate
Many people still let their personal rate outlook guide their mortgage strategy, a risky undertaking to say the least. Whether you’re renewing your mortgage or simply curious as to your current agreement, take the time to sit down with a mortgage professional to discuss your options based on current market figures. With that being said, it should be standard practice in mortgage planning to project you future mortgage payments at renewal. The point of this it to make sure you’re comfortable and prepared for future increases.
According to the CIBC poll, 86 percent of Canadians expect mortgage rates will either stay the same or go up sometime in the next year. What remains to be seen is whether Canadians are preparing and budgeting according to these expectations. Despite any rate predictions to the contrary, most mortgage brokers recommend running numbers based on rates at least 3 percent higher than your current arrangement.
According to Ottawa, household debt is the biggest domestic threat to the economy right now. As a mortgage holder, are your finances capable of accepting a larger mortgage payment? If mortgage rates rise, and they will, will your budget buckle under the pressure?
Mortgage Calculators Can Help
If you’re having trouble understanding how a rate change could impact your finances, consider crunching some numbers using a mortgage calculator. These nifty tools will help you better understand your renewal options, as well as provide you with payment breakdowns and interest overviews. Whether you’re a first time buyer or a seasoned investor, it never hurts to be prepared when it comes to managing your mortgage.
Study Information: The CIBC study data was gathered from a sample of 1,003 Canadians between March 8 and 12, 2012.