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Long-term mortgage rates are falling. Is it time to lock in?
May 10, 2023 | Posted by: Angela Robinson
The recent collapse of Silicon Valley Bank and Signature Bank has led to a ripple effect that has impacted financial markets in the US and Canada. However, amidst the turmoil, Canadian banks and lenders reacted swiftly by slashing mortgage rates, which could be good news for homeowners. Nevertheless, experts are warning borrowers to consider the penalties of breaking a fixed-rate mortgage if they decide to lock in, as there could be potential drawbacks to consider.
Victor Tran, a real estate expert, explains that breaking a variable-rate mortgage comes with a penalty of three months in interest. On the other hand, breaking a fixed-rate mortgage is a bit more complicated, as borrowers would either pay three months of interest or the value of the Interest Rate Differential (IRD), whichever is higher. The penalty can be significant, especially in a declining interest rate environment. If borrowers lock in a five-year fixed rate and rates subsequently fall, they could be charged a massive penalty due to the large difference between the rate they locked in at and the new market rate.
Jason Heath, managing director at Objective Financial Partners, warns that if there is a chance that homeowners might sell their home before their mortgage term is due, they should be careful about locking into a fixed-rate mortgage. Additionally, if borrowers have a variable-rate mortgage with a fixed monthly payment, locking in a fixed rate may cause monthly payments to rise. While a one percent difference in the mortgage rate on a $500,000 mortgage balance is only $5,000 per year, it could add up over the lifetime of the mortgage.
Therefore, borrowers need to weigh the pros and cons of locking in a fixed-rate mortgage in the current environment. If they expect rates to fall further, locking in a fixed rate now may be the wrong choice. Variable rates will benefit if rates fall, and there may be an opportunity to lock in a lower fixed rate over the next year compared to today.
In conclusion, the recent rate cuts by Canadian banks and lenders may provide homeowners with an opportunity to secure a lower rate on their mortgage. However, borrowers should be cautious and consider the potential penalties of breaking a fixed-rate mortgage, as well as the impact of locking in a fixed rate on monthly payments. By carefully evaluating their options, homeowners can make an informed decision that suits their individual circumstances.
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