Recent rate cuts may help you leverage better mortgage options and increase your savings. In a third consecutive meeting, the Bank of Canada dropped the overnight rate to 2.25% on September 4th, resulting in the Prime rate dropping to 6.45% with most lenders.
This means if you’re on an adjustable-rate mortgage, your payment will have decreased by roughly $15 per $100,000 of your balance. For variable rate borrowers whose payments remain the same, more of your payment will go toward the mortgage balance than interest, shortening the time it takes to repay your loan (the amortization). Line of credit borrowers’ interest costs have dropped by .25% as well.
Should borrowers be selecting variable rates?
Should current fixed-rate borrowers refinance?
Fixed rates are based on the bond market but downward trends on the variable side add to downward pressure for fixed rates.
Variable rates are projected to drop by 1.75% over the next year based on CORRA forward rates as reported by MortgageLogic.news.
Choosing between the two comes with a number of considerations:
- There may only be a short window of time during which you can refinance a fixed-rate mortgage before higher penalties kick in. If you’re considering exploring this option, please check in with me sooner rather than later to ensure you can capitalize on the opportunity. If you secured a higher-rate fixed mortgage in the last couple of years, please contact me for a review.
- Payments are higher on variable rate mortgages vs fixed, and most major banks’ Variable Rate Mortgages (VRMs) set the payment at the outset and they don’t change as rates go up or down. Most non-bank mortgage lenders offer Adjustable Rate Mortgages (ARMs)with payments that do decrease as the mortgage rates go down.
- Qualifying for a variable rate mortgage is more stringent.
- The savings on the variable rate have yet to be realized and are not expected all at once.
- The advantage of Prime rate drops affecting variable rate mortgages will depend on the forecasts being accurate.
- If rates keep dropping, a variable rate mortgage may offer the greatest flexibility. As rates drop, the penalty to refinance is much lower than that of a fixed rate mortgage generally. One can also lock into a fixed rate mortgage from a variable at any time. Some lenders also allow you to lock into a fixed term with a shorter remaining period than others. Waiting to lock in might allow you to wait for fixed rates to drop further before locking in.
If you’d like to review the market as these changes pertain to you, please reach out any time. My number is above and I am always happy to help.