Stay Variable or Go Fixed?

When discussing the strength of Toronto's housing market I am constantly being reminded/warned that an increase in rates will cause a significant shift in the market and cause it to "crash". The naysayers would have a point if home buyers were purchasing properties they may not qualify for normally, and be relying on the low variable rates to carry it. However, with this same argument in mind, the banks have been using projected rates to qualify buyers over the past couple of years. Buyers have had to qualify on what the rate may be in 3-5 years, thereby reducing the risk to the banks. Now add the new, and much lower, fixed rates into the mix. Locking into your mortgage for five years, with a 25-year amortization, would surely counter the rate increase argument, as well as provide stability to consumer finances.

With bond rates increasing over the last couple of months, and with the USA and global economies on the rebound, signs are pointing to rate increases in the next little while. As inflation rises and demand for commodities increases, the likelihood of the Bank Of Canada increasing rates increases. Now before you rush out and lock-in your variable rates, remember that traditional rate increases are 1/4 point, maybe a maximum of a 1/2 point. If you have a variable rate such as prime - 0.75 or prime - 0.9, stay with it for now. If you're rate is hovering around prime, take advantage of the fixed rates available today.

Another point I always make to our clients is that you should never shop for a mortgage on rate alone. Sure the 2.99% 5 year fixed is a great rate, however take the time to understand all the pros and cons about that mortgage. In the end, a 3.25% mortgage which allows you some flexibility in making extra payments throughout the year or even a lump sum on the anniversary date may prove to be the better deal.

Locking into a fixed rate will surely reduce the likelihood of a rate increase putting homeowners at risk. Keep in mind that even if you stay with your variable rate and it increases from 2.25% to 3.25%, your payment on a $200,000 mortgage will go from approximately $875 to $975. It is not a significant increase to monthly payments, however it is a slight increase.

From a Real Estate perspective, a crash due to slight rate increases is highly unlikely. As mentioned above, the banks have been taking a conservative approach to approvals over the past few years. The only contributing factor that could significantly reduce the strength of the housing market would be a sudden increase in supply. Our limited inventory level and continuous demand are the driving force behind the market.

Team Khan provides our clients with a network of mortgage professionals that will guide them in making an educated decision when it comes to mortgages. For your peace of mind, I have arranged Mortgage Evaluation Seminars over the next month. Mortgage professionals from the major banks will be able to answer any of your questions and review your mortgage details with you. Give me a call at 905-888-6222 to reserve your spot as seating is limited.

Regards,

Asif

Asif Khan, ABR
Re/Max Hall of Fame
Re/Max Chairman's Club
Re/Max All-Stars Realty Inc., Brokerage
905-888-6222

Posted via email from Markham Real Estate Today with Asif Khan