The Bank of Canada has warned that it will increase its key rate in the second quarter of 2022, so theoretically from April. Will mortgage interest rates start to rise for just five months, as early as January or July? No one has a crystal ball. What then to do to make the best decision in a context of uncertainty?
“As soon as we start talking about an increase, customers call us to find out whether or not they should wait before renewing their mortgage,” said Sylvain Poirier, president of the Association des courtiers hypothèques du Québec, on the phone. “The advice of a neighbor or brother-in-law is often not the one to follow. ”
Because giving general advice on mortgages tailored to each client is impossible, experts say.
So, before spending all the money that we think we can save by breaking our contract, freezing a variable rate or changing lender, we absolutely have to go through the first step, which is to check the penalties.
Find the penalties
There is either the penalty equivalent to three months of interest, or that which corresponds to the difference between the mortgage rate fixed at the signing of the contract and the current rate. Of the two, the lender will choose the penalty that is more costly for the customer with a fixed rate. For variable rates, it is usually the first that applies when the customer goes where the grass is greener.
“It’s easier to be assisted in your calculations by a mortgage broker,” says Stéphanie Potvin, who trains future brokers for the Quebec Mortgage Brokers Association.
PHOTO MARTIN CHAMBERLAND, THE PRESS
Stéphanie Potvin trains the future brokers of the Association of mortgage brokers of Quebec.
However, financial institutions have online penalty calculators. The client just has to follow the mortgage contract he signed at the start and he will have a good idea of the penalty to be paid.
Stephanie Potvin
For example, with a mortgage loan balance of $ 300,000, a rate fixed for 5 years in 2017 at 2.5% and a maturity in July 2022, the penalty varies between $ 1,800 and $ 3,500 depending on the institution.
With a rate set for 5 years in 2018, when interest rates were higher, the penalty climbs from $ 7,000 to $ 12,000 if the rate was 3.5% with a maturity in July 2023.
Did the customer have a 1% or 2% rate reduction when signing their contract? The penalty could double.
In the list of penalties, there is also the gift of cash back, which will probably have to be repaid in proportion to the number of months elapsed. Sometimes there are administration, appraisal, reinvestment, current mortgage discharge and new mortgage registration fees.
Fixed rate, do we break the contract or not?
“Last year, people contacted us because they had fixed a mortgage at 3.25% or 3.5% and said to themselves: ‘I’m going to break my contract to get a better rate, because they are at the bottom. by 2%. ” But the penalty was so high it wasn’t worth it, people weren’t getting their money’s worth. With a $ 14,000 or $ 15,000 penalty, we had better wait, ”suggests mortgage broker and trainer Stéphanie Potvin.
If, in 2020, the penalties were more expensive because of the low rates, they are likely to be less and less with the rise in rates. “On the other hand, the fixed rates will not be as advantageous as what we have seen at 1.89%,” notes Stéphanie Potvin.
“Often the only thing we negotiate is the rate, when everything that revolves around it matters,” recalls Sylvain Poirier. The rates are sometimes very low, but you can’t leave the financial institution unless you sell your property. ”
When all the penalty amounts are known, mortgage brokers can calculate the savings or not for different scenarios.
PHOTO CATHERINE LEFEBVRE, SPECIAL COLLABORATION
Sylvain Poirier, President of the Quebec Mortgage Brokers Association
There has to be a good gap to make it worth breaking your current mortgage. Most of the people who do the math are those with a small mortgage. And who says small mortgage says small savings.
Sylvain Poirier, President of the Quebec Mortgage Brokers Association
Variable rate, fixed or not?
Someone who stays in one place and just wants to fix the rate for the rest of their contract without requesting a refinance won’t have a fee. But is it really worth it?
“Take the client who has a variable rate of 1.30% and wants to fix it at the current rate for 5 years which is approximately 2.59%, illustrates Stéphanie Potvin. It will take several hikes in variable rates before reaching 2.59%. ”
Then there is the assessment of the client’s needs, which comes into play, recalls the trainer. Is his family situation likely to change? New child? Divorce? Is it the owner of a rental property, a chalet or a principal residence?
And how high will the fixed rate be fixed? asks Sylvain Poirier for his part. At the new customer’s rate or at the rate already in the branch? Because there can be a difference of 1% to 1.25%. ”
“The variable rate is still very competitive today,” says Stéphanie Potvin, while the fixed rates are on the rise. ”
Post-Christmas discounts
For now, the best advice is for homeowners whose term is in July: ask for a rate freeze four months before the end of the contract.
Better, in January, Quebec lenders will release promotions that will be valid until July 15, supports Stéphanie Potvin. “In the rest of Canada, they don’t guarantee a rate that far back in time. ”
“The rate will probably be higher than if we signed the contract tomorrow,” she warns.
Manage your emotions
To make the best decision in a context of uncertainty, it is a question of knowing your level of risk tolerance, recalls the president of the Association of mortgage brokers of Quebec. “I’m told the rates will go up, maybe that’s what will happen, but maybe not. We are not immune to a crash or a pandemic, ”recalls Sylvain Poirier.
In 2018, rates quietly began to rise, falling slowly in 2019, then drastically in 2020.
Unable to manage the wait and the uncertainty, some are ready to pay a heavy penalty to stop being anxious with this dilemma, says Stéphanie Potvin. “They want to be sure they have a low rate for the next three years. ”