Is It Time To Lock Your Variable Mortgage?

It seems like yesterday, ok maybe two weeks ago, fixed mortgage rates were below 2.5%. Now, they are hovering under 3% or slightly over 3% for investment properties.  After so many years of steady low rates, fixed mortgages spiked in a short period of time. So, is it time to convert a variable mortgage into a fixed mortgage?

Let's look at what drives the Prime Rate

Prime rate is set by the benchmark rate. The Bank of Canada has eight set dates every year where they announce any changes, if any, to the benchmark rate. Banks and mortgage finance companies based on Bank of Canada's announcements adjust the Prime rate accordingly.

What drives Prime Rate?

Inflation.  Core inflation is one indicator if the economy is hot and cost of living is rising fast. The Bank of Canada band for core inflation is between 1% and 3%. If core inflation increases above 3%, the Bank of Canada would tap on the brakes via increasing the benchmark rate to slow down inflation. In a deflationary state where cost of living is falling below 1%, benchmark rate is cut to stimulate spending.

Core Inflation

Chart courtesy of

Chart courtesy of

Per the above chart, core inflation is below 2% and is not trending up towards the 3% limit. There is no pressure on the Bank of Canada to increase its benchmark rate. 

It Takes Two Hands To Clap

Since the credit crunch, the Bank of Canada has attempted to stimulate the economy via monetary policy (low short term rates). The new Federal government, sworn in about a year ago, was elected with an infrastructure spending platform. It takes time for the governments to choose projects to fund, to cut the cheques, for new jobs to be created, for new workers to spend money and for the economy to get hot (inflation).  The Feds and Bank of Canada are working together through monetary and fiscal policy to get the economy going. It makes no sense for the Bank of Canada to tap on the brakes and work against the Feds when the Feds want to jump start the economy. It takes two hands to clap and both the Feds and Bank of Canada are working together.

What Should You Do?

Let's look at a case study:

Mortgage balance: $350,000
Current mortgage: Variable at prime-0.45% (2.25%)
Amortization: 25 years
Monthly payment: $1524.64

Option to lock in at 5 year fixed 2.84%
New monthly payment: $1627.76 difference of $103.12 per month

Possible Solutions:
Leave mortgage as variable but increase payment to fixed amount
The additional $103.12 will go towards the mortgage principle reducing the effective amortization from 25 years to 23 years. That's paying off your mortgage 2 years earlier! What would you do if you had no mortgage payments for 2 years? Hopefully, not getting into a car loan......

If you own an investment property consider leaving the payment as is to maximize your cash flow and tax deductibility (interest portion of the mortgage payment).

Making decisions out of fear can be costly, talk to a mortgage broker who can show you the numbers and let the data guide you.