You can usually find a variable rate mortgage for at least half a point lower than any fixed rate mortgage, but choosing a variable rate mortgage makes you subject to unexpected rate hikes. Many times people decide to switch from a variable rate to a fixed rate mortgage before their term is up. Here are a few common mistakes that are made when switching and how you can avoid them.
Locking in Too Late
Most people don’t have time to constantly analyze mortgage rates, so by the time they get wind of the Bank of Canada’s mortgage rate increases, it is already too late. Fixed mortgages are based on prices in the bond market, and bond traders start raising rates before the Bank of Canada has touched mortgage rates. You might assume that this means you can just watch bond yields in order to figure out where mortgage rates are headed, but this isn’t so simple either. Bond rates fluctuate greatly, and only an experienced trader will be able to identify the patterns that point to mortgage rate hikes.
Many times people lock into their mortgage rate after prices have already increased, at a percentage higher than their variable rate would have been.
Conversion Rates – Not Your Best Bet
When you’re converting from a variable mortgage, your lender is unlikely to give you the best rate on your fixed mortgage. Conversion rates are normally one-fifth to one-half percent higher than rates given to new customers. And negotiating a better rate is unlikely, as lenders know the penalties you’ll receive for switching mid-cycle are too great for you to consider leaving for another lender.
Other Things to be Aware Of
When switching from a variable rate mortgage to a fixed rate, your monthly payment will usually increase. You may also have to pay penalty fees in order to lock in or be forced to lock in with major refinance restrictions.
Variable rate mortgages can be a great thing, but choosing one with the idea that you’ll switch to a fixed rate mortgage in the near future is something to do cautiously.