What are the risks of taking a fixed rate today?

After the most recent Bank of Canada announcement, the overnight rate is now 4.25 per cent. This means in many cases, fixed rates are lower than variable rates. Many borrowers might be tempted by the thought of taking a fixed rate to save money, as the odds of a recession seem to be rising. However, it’s still important to be aware of the risks surrounding this move. Taking a fixed rate isn’t necessarily the best path right now. Of course, it all depends on your unique circumstances, but here are a few points to consider before making the switch.

Variable rates will go down

After seven rate hikes in a row, it’s understandable to be frustrated with variable-rate products. Fixed rates can definitely be tempting because of their stability and, right now, they are often lower than variable rates. However, it’s important to remember that variable rates will go down again, likely in 2023. As we come closer to the new year and a potential recession looms on the horizon, variable rates will drop in response. Unfortunately, if you have a fixed rate at that point, you won’t be able to benefit from any rate decreases. You might end up paying pre-downturn interest rates during a tricky economic period, where variable rates are much lower and easier to manage. It’s important to think ahead about what might be coming down the pipe in terms of interest rates before switching to a fixed rate. In the here and now, fixed rates may look better, but remember this is a decision you will be living with well into the future.

The penalty to exit a fixed rate is high

Now, it is possible to exit a fixed rate and switch back into a variable rate, but this can do more harm than good. The penalty to break a fixed rate is high. Fixed rate penalties use the interest rate differential (IRD), which is usually more costly than the three months’ interest penalty you experience when breaking a variable rate. This means even if you revert to a variable rate, the cost to do so will often be too high to actually receive any benefits. Since it’s hard to exit a fixed rate and still save money, it’s not something you should do based purely on present-day factors. You need to look ahead to how rates might change before deciding which path is best for you.

Renewal time might bring much higher rates

Finally, even if you take advantage of today’s relatively low fixed rates, your mortgage will eventually come up for renewal again. Some borrowers who lock into a low fixed rate are surprised when renewal time comes and their rate has increased. Remember, just because your rate is fixed, that doesn’t mean it NEVER increases. It just means it won’t increase during your term. However, come renewal time, fixed rates can certainly go up. If you get too comfortable living with a lower fixed rate, then suffer a nasty surprise when you have to renew with a much higher fixed rate, this can be financially unsettling. The benefit of a variable rate is you know what’s going on with interest rates and how your payments might vary at all times. However, those with fixed rates may lose track of how their payments might have to increase when they need to renew. Taking a fixed rate means you will need to be mindful to not get too settled with the rate you lock into, because it will likely change at renewal time.

Fixed-rate products are certainly appealing today, and there are circumstances when they are the best option for borrowers. However, it’s still important to be aware of the potential risks of taking a fixed rate. Staying well-informed about your choices is the best way to ensure you can make the decision that’s best for you, both today and in the future. Of course, you also don’t have to navigate the process alone! As mortgage brokers, we’re here to help all of our clients find the right product for them, so don’t hesitate to reach out.

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.