Increase of Prime Rates – What Does This Mean?

With the increase of prime rates over the last few months, there’s a lot in question. Many people are questioning if they should have a fixed rate mortgage or a variable rate mortgage. There are many factors to consider when choosing between fixed and variable rates, this blog will help make your decision more simplistic.

When looking at which rate to choose, you’ll need to consider the pros and cons of both rates, and what may be the most beneficial for your mortgage financially.

1. Pros and cons of a fixed rate

• Pros
  • You have stability for the term of your mortgage. Your mortgage payment will remain the same and there will be no charge to your mortgage payment each month.
• Cons
  • A fixed rate is typically higher than a variable rate
  • If you were to break your mortgage you may be charged at interest rate differential. An IRD can be a significant cost and it is typically 4.7% of the balance. This works out to $4,700.00 for every $100,000.00 that you have borrowed.

2. Pros and cons of a variable rate

   • Pros
     • A variable rate is typically lower than a fixed rate.
     • Statistically a variable rate has outperformed the fixed rate for the last 40 years.
     • You have the option to lock into a fixed rate at any point in the term of your mortgage at no cost.
     • If you break the term of your mortgage early your penalty is almost 3 months interest.
   • Cons
     • Your rate will change as the Bank of Canada adjusts the prime rate.
     • Pending on the lender your payments can fluctuate.
     • As prime rate changes the amount going to interest and principal will vary.

Look at the case study below:

Prime Increase of 0.75%

• The lowest 5-year variable rate is 3.75 with a monthly payment off $2,123.36
• For every $100,000 mortgage the monthly payment increases by $26.00
• If you have a mortgage of $413,000 your monthly payment will increase by $107.38
• The monthly payment will come out to be $2,230.74

• Todays best 5-year fixed rate is 5.63%
• For a Mortgage of $413,000 – monthly payment will equal to $2,568.34
• This monthly payment is HIGHER with the Bank of Canada increase to Prime by 0.75%
• Continue to choose variable!

It is PARTICULARLY important to have a clear understanding of the implications when it comes to choosing between variable mortgage rates and fixed mortgage rates and what’s best for you. It makes a significant difference in future planning and can impact you in incredibly substantial ways.

At GLM Mortgage Group, we know what questions to ask. We have relationships with the lenders that you know about and the lenders you don’t. We would be pleased to educate you on the financial options available to you. We want you to make the best decision possible on the mortgage that you are committing to. Call us anytime for a FREE consultation on the mortgage products available to you.