Money & Career

Should you lock in a fixed rate mortgage?

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Money & Career

Should you lock in a fixed rate mortgage?

A few years ago, variable rate mortgages were all the rage. Interest rates were falling so it made sense to go variable. This meant that your mortgage payment would decrease as interest rates dropped. Now, though, rates have bottomed and Bank of Canada Governor Mark Carney says it won't be long before he raises them.

Since rates only have one way to move -- up -- a lot of people are now wondering if they should lock in to a fixed rate mortgage. Is it a good idea? Probably, but it depends. Here are four things to consider before locking in to a fixed rate mortgage.

1. Historically low rates

While fixed rates are higher than variable ones, they're still at historical lows. You can find a five-year fixed rate mortgage for about 3 percent in parts of Canada, which is almost unheard of. Other institutions are offering rates between 3 percent and 4 percent, while some are closer to 5 percent. When interest rates rise, so will these fixed rates, so if you want to take advantage of these cheap borrowing costs, lock in today.

2. What will you pay?


It's impossible to know when interest rates will rise and by how much, but as long as the economy stays shaky -- as many people think it will -- it's unlikely rates will soar over the next five years. With your variable rate likely close to 2 percent, if the Bank of Canada increases interest rates by, say, a percent over the next year, it's likely you'll still be fine in your variable mortgage until your term comes due.

If you think rates will rise faster, and can find something that's lower than 5 percent, then locking in to a fixed rate mortgage today may be cheaper in the long run.
3. Lock in for longer

Typically mortgage terms are five years, but many institutions offer 10-year terms. Some lenders are offering incredibly cheap rates -- around 4 percent -- on this decade-long term. TD Bank is offering a rate of 6.75 percent, which isn't that cheap, but who knows where rates will be in a decade?

If you think rates will continue rise over the next decade, locking into a longer contract -- especially if you can get a low rate -- could be a wise move.

4. Are there any fees to lock in?

Most lenders let you switch from a variable rate mortgage to a fixed rate mortgage for free, but make sure to read the fine print. There could be situations where you have to break your mortgage -- maybe you have a higher fixed rate from years ago and want a lower one -- or perhaps you could be charged processing fees to make the change. If there are any costs, do the math and make sure switching to a fixed rate mortgage is worth it.

With interest rates where they are now, getting a fixed rate mortgage makes a lot of sense whether you're a new homeowner or one who's on a variable rate. Lock in to an affordable mortgage rate and you won't have to worry if interest rates really do rise next year.
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Should you lock in a fixed rate mortgage?

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