Clark Wealth Management Group - ScotiaMcLeod Fredericton

With variable rates as low as 2.50% and 5-year fixed rates as low as 3.95% it’s crystal clear, current mortgage and loan interest rates are far below normal. Today we’ll look at how you approach the decision of whether or not to lock in your mortgage rate now.

If you want to know what your payment will be for the next several years, a fixed rate mortgage makes sense for you. If you are a homebuyer with the minimal down payment, or you are renewing a high ratio (low down payment) mortgage, you likely should go this route. Similarly, if you’re among those who are using the equity in their home to consolidate higher interest rate debt, certainty in your payment is a good idea.

One of the benefits of getting a low fixed rate mortgage is that you can often take your low rate mortgage with you to your next home if you decide to move. Also, if you’re selling your home after interest rates have gone up, an effective marketing technique is offering your assumable low rate mortgage to potential buyers.

If predictability of mortgage expenses is less important for you, a variable rate mortgage in the 2.50% range may make sense. A variable rate will typically appeal to a homebuyer who has a significant down payment and lots of flexibility in their budget.  The attraction of a variable rate mortgage is the potential saving of the difference between the fixed and floating rate.

At the moment, the 1.45 percent spread between the variable and 5-year fixed interest rates is unusually small. Waiting for rates to begin to rise before locking in for a longer term could mean a more significant difference between fixed and floating options.

For borrowers who want to have it both ways, many lenders have developed innovative mortgage products that allow people to diversify their mortgage over different terms and between fixed and floating rates. Scotiabank calls theirs the “long and short mortgage”. While these product innovations are interesting, their practical application for most borrowers is debatable given the complexity they add.

Whether you take a fixed or floating rate mortgage is a personal choice and should reflect your own tolerance for risk, your monthly cash flow situation and the current interest rates.

Based on my understanding of the current rate environment, I believe interest rates are heading up – although not dramatically. There is also a limited advantage to staying with a variable rate at this time. Therefore I believe many mortgagors would be wise to take advantage of today’s low fixed mortgage rates and lock in.

Keep this rule of thumb in mind: Floating rate debt is attractive for the borrower when interest rates are high and expected to decline. Fixed rate debt is attractive for the borrower when interest rates are low and expected to rise. Your take on where we are in this interest rate cycle will help guide you in making your decision.

Whether buying, renewing, or refinancing, spend time with a qualified banker or mortgage broker fully exploring the pros and cons of the available mortgage options. 

Keir Clark, is a senior wealth advisor, with Clark Wealth Management Group and branch manager at ScotiaMcLeod in Fredericton, NB. He can be reached online at www.keirclark.ca or by telephone at 506-450-6465.

Information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, expressed or implied, is made as to the accuracy or completeness.