With a rise in interest rates by the end of the year all but certain, variable mortgage rate plans have become less enticing than they’ve been in the last decade.
With the interest rate at an historic low throughout the past decade, variable mortgage plans haven’t carried much risk. However, according to Anne Brill, Principal Broker of Centum Metrocapp Wealth Solutions, the recent uncertainty with interest rates carry more risk than many customers can afford.
“I believe now the way the government is talking about potentially more increases in October – we’ve had two increases in the last few months – I believe the spread between a variable rate with potential increases and a five-year rate is not worth the risk of doing the variable,” she said. “The spread is not large enough to take on the variable rate right now for most people.”
The prime rate is presently 3.25% and would come in under 3% with a discount, but the five-year fixed rate is somewhere in the low threes. With a quarter increase in October, Brill is reticent about advising her clients to roll the dice.
“Depending on how big the mortgage is, it could be hundreds of dollars a month in payment, so can you afford to take the risk? Can you sleep at night?”
Brill also says each mortgage is unique to her clients’ needs, but the variable rate – which has been standard for the past decade – is beginning to lose ground to the fixed rate in recent months. She has been fielding a lot of calls from frenzied clients.
To elucidate how low the interest rate has been, Brill says that when she bought her home 16 years ago, the prime rate was 6%. And while the halcyon days of this past decade aren’t likely to become viciously supplanted with a prime rate as high as when Brill bought her home, rates probably won’t come back down – at least not for a while.
“It seems like an upward trend right now,” continued Brill, “and it seems like rates will only go up.”
She says that even in spite of the drop in home values recently, they still increased in value year-over-year.
But Adma Maher, a mortgage agent with Assured Mortgage Services, says she still recommends the variable rate to her clients because if rates begin climbing, clients can always call their bank and lock their rate.
“Going into the variable rate, you always have the option to lock it in,” said Maher. “But I also speak to them about what their plans are. If they’ll sell down the road before the five years is over, I’ll definitely recommend the variable rate. The variable is always lower than the fixed, I advise them to keep an eye on the market and if at any point the rate goes up, they have the option of locking for five or six years.”