Fixed rates have fallen to their lowest levels in more than two years, with 5 year fixed rates as low as 2.54%. Anyone currently in a variable rate mortgage will know that this is lower than their current rate. Even those with the deepest prime rate discounts would be paying 2.75%.
With fixed rates being so much lower, does it make sense to convert your variable rate into a fixed?
Pretty much all lenders offering variable rate mortgages will allow you to convert your rate to a fixed rate at no cost to you. Fixed rates are lower than variable, but that doesn’t necessarily mean that you should be converting your rate.
It’s unlikely that your lender would covert you to their lowest 5 year fixed….let alone, the lowest rate on the market. Even if your lender had this rate available, they wouldn’t offer it to you in this case. It would be at their regular rate, not their promo rates. For example, if your lender had 2.54% available for new clients, they may only offer you 2.69% to convert your variable into a fixed. Or possibly even higher.
There are many things to consider, and it’s all about timing.
There may be times when it will make sense to convert your rate, just as there will be times not to. Chances are very strong that the Bank of Canada will cut their rate at some point in the first half of 2020, which could come as early as January 22nd 2020. Unless there is a large difference between the rate you are paying on your variable now and the lowest fixed rate offered, it will make sense to stay put with your variable rate.
If you are paying over 3% on your variable right now, then it may make sense to look at your options. If you have a mortgage with $400,000 owing at 3.00%, with 3 years remaining on your term, then you would save $3,641 for the remaining 3 years if you were to convert to 2.69%.
That’s IF prime rate were to remain the same for the remaining three years, which is highly unlikely.
Given that prime will likely drop, it would not make any sense to make a move in this case. If your variable is at 3.25% or higher however, then a switch could possibly be considered.
Just because it can be considered, doesn’t mean it will make sense to make the switch. There are many variables involved:
- Rate you are currently paying
- Time remaining on your current mortgage
- New rate available to you
- Penalty amount
- Market outlook
- Your plans for the future
Another option would be to switch your mortgage to a different lender mid-term, in which case you may be eligible for the 5 year fixed at 2.54%*. The three months penalty would apply, however this can often be offset quite easily, depending on the fixed rate being offered by your current lender.
Everyone’s situation is a bit different, and there is no one size fits all mortgage advice. Feel free to reach out to us and we’d be happy to analyze your situation for you and let you know there are any options that make sense for you.
*The 5 year fixed rate at 2.54% is available for purchases or switches with 35% or greater down payment / equity. Property must be valued at under $1 million OR must have been purchased prior to November 30, 2016. Owner occupied properties only.
Paul Meredith is the author of the Amazon #1 best selling book, Beat the Bank – How to Win The Mortgage Game in Canada, and has ranked as one of the top 75 mortgage brokers in Canada since 2016. He was a finalist for Mortgage Broker of the Year in 2018, and can be seen as the exclusive mortgage broker on season two of TV’s Top Million Dollar Agent.