Before you lock in your variable rate
In times of economic uncertainty, when interest rates trend upward, we tend to see a significant push of variable rate holders looking to lock into a fixed rate term.
Of course, the security of knowing your payment will stay the same for your term despite what is happening in the market and the assurance that you won’t have to budget for increases are inviting. However, it’s important to consider all factors and possibilities before making a decision as there are some potential downsides as well.
Typically, homeowners who opt for variable rates do so knowing that they will be assuming some risk of fluctuation with the reward of a rate that is historically lower than fixed rates available. Another reason buyers opt for variable mortgages is the flexibility they offer. Unlike fixed terms, which can come with sizable prepayment penalties if the term is broken early, variable terms generally carry a penalty of only around 3 months’ of interest.
With this in mind, consider that fixed rates may experience some decrease after you’ve locked in. This could mean that you’ll be forced to decide whether to continue paying a higher fixed rate or pay a lump sum upfront to take advantage of lower rates and lower your monthly payment.
One way around this potential downside of locking in is to consider a shorter fixed term of 1-3 years. Taking a shorter term could allow you to enjoy the benefits of a static rate and payment for a shorter period with the ability to take advantage of potential lower rates sooner. However, the shorter the term, the higher the rate, so you will end up paying more monthly for this added flexibility.
It’s important to consider all of your options and work out all potential situations before getting any mortgage, but especially before making the decision to lock in your variable rate. Working with an experienced mortgage professional who loves to crunch the numbers is key so if you’re ready to discuss your best course of action, my calculator and I will be here waiting!
