Any changes to your variable rate mortgage will happen only if the Bank of Canada chooses to change the overnight lending rate which in turn prompts the lenders to reset their prime lending rate (and variable rate mortgages and lines of credit). So it is important to make the most of your variable mortgage.
The Bank of Canada meets 8 times each year. The schedule for 2015 is: Jan 21st, Mar 4th, April 15th, May 27th, July 15th, Sept 9th, Oct 21st and Dec 2nd.
Although the Bank of Canada has not confirmed they will raise the overnight lending rate at a specific time economists are suggesting a rise in the rate could happen later this year. Talk of a rate increase in the USA due to economic growth is fueling this discussion.
Regardless of any upward movement in the overnight and prime lending rates, as always I recommend to my clients to make the most of your variable mortgage. Refer back to your original decision to choose a variable rate mortgage. If you have been following your plan and strategy to maximize the variable rate option — a shift upwards in the rate will have less of an impact.
Remember – to lower your cost of borrowing and maximize the pay down of your mortgage.
Set your payments higher than your current variable rate by 10-20%. I recommend setting your payments at the level of a 5 year fixed rate and then either increase the payment each year OR put lump sum payments each year. This could reduce the amortization by several over the time of your 5 year term. This seems like common sense advice but many people don’t follow through. Life gets busy and making the shift never happens. I urge you to start —and make the most of your variable mortgage.
If your variable rate mortgage is up for renewal in the next 12-24 months a prime rate increase may be offset by the savings on interest you enjoyed in the first 24-36 months of your mortgage. If you have been paying lower interest below the prime rate of 3% while 5 year fixed rates have been around 3% or higher your savings can exceed any extra cost of borrowing in the final 12-24 months of your mortgage term if rates were to rise by .25-.5% as predicted. If you have been exercising your pre-payment options by increasing payments or adding lump sum payments this gain may be even greater. Run the numbers with your mortgage broker to see what is best for you.
If your variable rate mortgage is up for renewal beyond 2 years from now you might consider locking into a fixed rate now. Or you may choose to ride it out if you are maximizing your payment options. This decision would depend on the mortgage agreement, the amount, the current variable rate, your plans for moving or staying in the home and other factors. We would review your needs and run the numbers to help you make an informed decision.
Always consult your mortgage broker before making a move with your lender —a few minutes on the phone or a full review— can make all the difference.