In the last week I have had over 75 phone calls and hundreds of emails from people asking whether they should lock in their mortgage. It seems that a couple banks raising fixed rates can really cause a panic, even though it shouldn’t. What panics me is the way in which the media picks up on the story and runs with a distorted understanding of the subject. If you really want to know whether you should lock in your mortgage, it is time for you to take your knowledge into your own hands.
Read the following study, and note all of the times in history where rates were rising and a variable rate mortgage was still a better alternative. Also note that the two times in history a fixed rate has been a better choice was when prime rates (variable) were higher than fixed rates, this is far from the circumstances which we find ourselves in now.
You can find the study here
Furthermore, Garth Turner, as polarizing and sensationalistic as he is gave a good assessment a couple of days ago.
But the big question I was asked today: what should you do about your mortgage?
The bankers will be on the phone to you soon ‘suggesting’ you lock in, ‘for your own protection.’ Have none of it, if you are in a cheap VRM. We know why the lenders are saying that, since they count on scores of people now rushing in to voluntarily increase their payments. Once again, they play the emotional card, consistently suggesting actions counter to the best interests of Canadians.
A prime-minus VRM is a gift. Keep it. The Bank of Canada rate would have to soar by more than 200 basis points (2%) by Christmas for you even to consider locking in. And even then you would be saving money staying variable. In fact, the typical prime minus one half borrower would be better off staying put until the prime mushroomed almost 4% above current levels. You’d still be paying less a month.
And a prime rate of 6.25% is not going to happen for two, three or perhaps four years. Any sooner and you could mop up the economy with a Swiffer.”
If you want my opinion on the subject you can sign up to receive posts from asknolan.com directly to your inbox, and I will include the chapter from my book that discusses just this topic in a couple of days.
