As rate hikes continue, is it time to lock in your variable rate mortgage?

With the Bank of Canada long awaited to announce another huge rate increase next week, a growing number of variable rate mortgage Holders are asking a dreaded question: Is it time to lock in a fixed rate?

The answer usually comes down to the state of homeowners’ family finances, said James Laird, co-CEO of Ratehub.ca, the online rate comparison site, and president of mortgage brokerage CanWise Financial.

Borrowers who care at all about their ability to absorb more mortgage rate hikes should “seriously consider” switching to a fixed rate, he said. For those who still have a lot of wiggle room in their budget, it’s about choosing the option they think will ultimately save them money, Laird added.

Should Interest rates decline in late 2023 and 2024, assuming inflation pressures ease amid a now widely expected recession, keeping a variable mortgage rate could still be “the right strategy,” he said.

Calculator: Compare how different interest rates affect the cost of your mortgage

For now, though, anyone with a variable rate should prepare for more pain. The Bank of Canada has already increased its trend-setting interest rate to 3.25 percent, down from 0.25 percent in early March. And as it continues to battle inflation, the central bank is expected to announce another half percentage point increase on October 26, with more hikes likely in December and early 2023.

Some projections see the Bank of Canada rate rising as much as 4.5 percent next year.

When the key central bank rate changes, banks typically adjust their own prime rates, the benchmarks to which variable rates are pegged. For every quarter percentage point increase in the Bank of Canada rate, a homeowner with a variable interest rate and fluctuating payments can expect to pay about $14 more per month for every $100,000 of outstanding mortgage, according to Victor Tran, a real estate expert on Ratesdotca, a financial product comparison site.

For recent homebuyers who haven’t put a dent in their principal balance and Canadians with large mortgages, the pain of those rapid rate increases has been especially acute.

For example, a homeowner with a mortgage balance of about $380,000, about the average amount first-time homebuyers borrowed over the past two years, would have seen their monthly payments increase by more than $600 since March. If the Bank of Canada rate were to rise to 4.5 percent, that borrower would end up with a payment roughly $900 more than what he signed up for.

And while the vast majority of variable-rate holders have loans that would normally keep the same payments even if interest rates rise modestly, that feature no longer guarantees peace of mind in current market conditions.

The recent list of interest rate increases means that adjustable-rate mortgages are beginning to catch up to their so-called “rate of fire”: The rate at which the monthly payment no longer covers the interest due. borrowers approaching his trigger They are generally willing to take larger payments unless they can make lump sum payments for their principal.

But switching to a fixed mortgage rate comes at a high cost amid record mortgage rates.

Variable-rate holders who lock in will typically not have access to their lender’s most competitive rates, which are reserved for new customers, Mr. Tran warned.

Borrowers will also have to commit for a period equal to or longer than the remaining term of their mortgage, he added. In other words, an owner with a variable of five years and three years before renewal would have to take out a fixed-rate mortgage for at least three years.

Those who prefer to stay with a shorter term in case rates start to fall before too long, would have to break their mortgage and pay a penalty. The fee is typically equal to three months’ worth of interest applied to the remaining principal balance.

Switching to a rival lender that offers lower fixed rates also means breaking your mortgage.

But an even bigger hurdle to hunting fixed-rate mortgage deals for many of today’s adjustable-rate mortgage holders comes from having to requalify for the mortgage stress test. For those switching lenders, the test requires federally regulated lenders to verify that a new borrower can keep up with their payments at 5.25 percent or a rate two percentage points higher than the offered contract rate.

With current five-year fixed rates often above 5 percent, borrowers hoping to secure could easily face a qualified stress test rate above 7 percent, a high bar for many homeowners to overcome, Laird said. .

Mr. Tran said most of his variable rate clients, who are mostly high net worth clients with stable incomes, are staying where they are for now.

Still, anyone wondering whether they should insure themselves should seek professional guidance, said Frances Hinojosa, a mortgage broker and co-founder and CEO of Tribe Financial Group.

“If you’re asking yourself that question, it’s time to talk to a mortgage professional about your options.”

If you have an adjustable rate mortgage with fixed payments, you can estimate your own trigger rate with the calculator below.

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