Remember the rule of 50

Remember the rule of 50

Remember the rule of 50

In light of the GDP’s slower-than-expected growth, the Bank of Canada didn’t raise interest rates yesterday, but that doesn’t mean Canadians can breathe a sigh of relief.

Dylan Furlong, a partner and director of sales at Champion Mortgage, noted that, while the variable rate didn’t increase, the fixed rate likely will because it’s tied to the world economy.

“What we’ve seen with fixed rates since last year is that they have gone up almost a percent, and they’re all over the place,” said Furlong. “The good thing about the fixed rate is the rate you have is secure until renewal.”

However, upon renewal the mortgage stress test could make things a tad hairy for people in fixed-rate mortgages.

“There is potential with the new stress test, and increasing fixed rate, for current mortgage holders to be stuck in their current mortgage and not be able to switch,” said Furlong. “When that happens—and banks and lenders know this—they’re stuck and subject to higher interest rates and will have to renew with their current lender.

“On the flip side to that, if you have a good broker who knows what they’re doing, there’s potential to refinance. If you’re cash tight and you’re stuck with your current lender, you can refinance some of that and pay no penalties if it’s on your renewal date. What they can also do is extend amortization. You can go to one-year, two-year, or variable. There are all kinds of products out there a good broker will analyse.”

Rakhi Madan, a broker with DLC Key Mortgage Partners, doesn’t see much cause for concern because, in her opinion, the five-year bond yield won’t go up more than 20 basis points. She has nevertheless noticed consumers opting for shorter-term mortgages.

“With the discount on variables that lenders are offering right now, I’m seeing more and more consumers go towards short terms and variables over five-year fixed,” she said. “I follow rule of 50—if the difference is 50 basis points between the fixed and variable, I’d tell the consumer to go towards the fixed rate, but if you’re over 50 basis points, I’d tell them to go towards the variable.”

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