Most people who purchase homes in Canada go with variable rate mortgages, as these tend to be more cost-effective over time than five-year fixed rates. In fact, many people who have gone with the variable rates have ended up saving quite a bit of money on their mortgage over time, which has put more money in their pocket. Since this seems to be the way to go, it shouldn't change...right? This is actually not the case, as a new report by BMO Capital Markets has showed that the economy is improving, and this might mean that those variable rates are no longer as good as they once were.
Why Five-Year Fixed Interest Rates?
Right now if you went to one of the big Canadian banks, you would probably find a five-year fixed mortgage for around a rate of 3%, and the variable rates would be below that. Since everyone wants to save money, especially when it comes to such a large purchase like a home, they are going to go with the rate that saves them the most. This makes sense because really, nobody wants to spend thousands of dollars more just on interest that they are paying to someone else. So, why are reports showing that the fixed mortgages are the best choice going into the future? It's actually because the economy in Canada is improving!
With the strengthening of the Canadian economy, most economists are predicting that low interest rates may be coming to a close. This is even more true with signs that the U.S. economy is starting to recover, and their housing market is starting to accelerate more than it has in recent years. It is going to take some time for variable interest rates to climb, but keep in mind that those fixed interest rates probably won't be as low as they are now in the near future. This could mean having to spend more later on, and that is money out of your pocket that could have been saved.
How to Adapt to Interest Rate Changes
Will this change really affect you right now? If you're already stretched thin with your mortgage, which is the case with a lot of first-time buyers, then yes. A drastic increase in your interest rate could mean not being able to pay your mortgage in the future, or not being able to put as much money away in savings. By locking in a slightly higher fixed rate now, you could ward off any potential increase that could end up costing you much more in the long run.
This increase has been expected in the U.S. as well as Canada, and interest rates should be increasing steadily starting 2015. If you're looking for the most cost-effective option for you, then it really depends on your financial situation and what a fixed interest rate versus variable interest rate could mean, both now and into the future. One thing is certain: the economy here is getting a lot better, and that means that you can kiss those really low interest rates goodbye for quite a while.
I am a licensed member of the Real Estate Council of Alberta since 2005 - proudly representing CIR REALTY, Calgary’s largest real estate brokerage. I enjoy keeping my readers up to date with real estate related information that they can easily understand and use for their own benefit. I welcome feedbacks and comments equally from first-time visitors to my blog, past clients and also from my fellow REALTOR® colleagues. Thanks for stopping by!