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3 Apr

Considering taking a fixed instead of variable? Here is why you shouldn’t.

General

Posted by: Mike Hattim

There has been a lot of buzz around increasing interest rates which have left many home owners worrying about whether they should lock in their current variable rates now to avoid future increases; and has left current home buyers wondering if they should take a fixed rate instead of the variable.

Here is my opinion on the matter.  First, mortgage news is not entertaining or sexy so in order for all these media sites to generate their clicks, they need to make it sound scary or life changing so they use their headlines to make things sound far worse than it actually is.

Since early 2020 we have had a ‘break’ in interest rates due to the pandemic we have all had to deal with but it was inevitable and hopeful that things would go back to how it was. In January 2020 the prime rate was at 3.95% and had drastically dropped to 2.45% and held there for 2 years and has recently increased to 2.70%.

But now that rates are increasing, what is it we should expect?  Well in order to think realistically we must look at the facts.  The last time the prime rate was as high as 4% was in 2008, which was 14 years ago.  The highest the prime rate has been in the last 12 years was 3.95%.  Think about this when you start to worry about the prime rate going up to 4%, 5%, 6% in a short period of time and understand there is no data to validate your concern.

Now, could the prime rate increase above 3.95% within the next 5 years.  Sure.  It is possible but unlikely.  My prediction is we will see the prime rate reach between 3.50% and 4.00% and hold steady for a while over the course of the next 2 – 5 years.

So……what should you do?  If you’re purchasing a home today your options for fixed rates will range approximately between 3.79% and 3.99% and your variable rate options will range between 1.60% to 1.85%.  In most cases you are already starting out almost 2% lower with your variable rate VS fixed rate, giving you a running start in savings before the gradual and expected prime rate increases over the term of your mortgage.

The math speaks for itself and the risks involved are not nearly as bad as the media has perceived it to be.

This chart shows all the prime rate movements between 2010 and 2022.  For any questions please contact me to discuss.