|So what happens when you switch to a fixed from a variable anyway?You’re going to pay more interest, and it will cost you more to break your mortgage. |
First of all, you’re going to pay more interest. Generally speaking, fixed rates are higher than variable rates of the same term. The reason you’d consider locking in mid-term would be to hedge yourself against, potentially, a higher variable rate in the future. But by fixing it mid term, you’ll always end up paying more interest in the short term and in most cases, the long term as well.
The Bank of Canada has 8 scheduled announcements per year and they rarely move more than .25% per announcement. So it could take years for the future variable rate to even match the fixed rate of today.
Secondly, by moving to a fixed rate from a variable rate, it could be considerably more costly to break that fixed-rate mortgage.
Although each bank calculates the penalty to break a mortgage differently (the big banks being the worst), breaking a variable rate will typically cost 3 months interest or 0.5% of the mortgage balance. Meanwhile, breaking a fixed rate mortgage with the Interest Differential Penalty (IRD) could mean paying up to roughly 4% of the mortgage balance.
6/10 Canadians will break their current mortgage at an average of 38 months. If you’re dealing with a 5-year term, an IRD has the potential to cost you a lot of money… certainly worth considering before locking in.
Now, of course, each person’s financial situation is different and it’s impossible to provide one-size-fits-all advice. There may be circumstances that warrant locking in, so if you’d like to discuss your mortgage and what the numbers look like for you, please reach out anytime!