The real-estate and finance markets in Canada are tumultuous to say the least. With rates at decade highs, and media outlets spewing fear, it’s important not to get caught up in the emotion of it all.
Let’s step back and look at three situations you, or someone you know might be facing towards the end of 2023.
Scenario #1: My mortgage is up for renewal in the next few months
It’s no secret that the lowest available rates right now are 5-year fixed terms, but that does not mean they are the best choice. With the country entering (or already in) a recession by many metrics, there is a strong possibility the Bank of Canada will be reversing course on their interest rate hikes as soon as Spring 2024. You’ll be kicking yourself in a year or two if rates have come down substantially and you’re still locked in for another quarter decade.
My advice? If you can withstand the short-term pain, go for an Adjustable-Rate Mortgage (ARM) at around Prime -1.00%. Sure, your rate will be higher than the fixed option for the first year or so, but beyond that you could be positioned to save thousands – AND – you’ll always have the flexibility to lock in with your lender if one day in the not-so-distant future they happen to be offering a very attractive fixed rate.
If the adjustable/variable option feels too risky for you, I would recommend looking at a shorter fixed term. Rates for 1 and 2-year terms are too high at around 0.5 – 1.0% than longer terms, so look to the 3- and 4-year options which offer comfort and stability without the serious commitment of a 5-year term.
This will allow you to lock into a relatively reasonable rate, ride out one more potential rate hike, then watch rates come down over the course of a few years before renewing again.
Scenario #2: I’m in an adjustable-rate mortgage with 2-3 years remaining
First off, congratulations for making this far. For holders of adjustable/variable rate mortgages, the last year has been nothing short of harrowing, but now is not the time to quit!
You’ve made it through the worst of it and there is light at the end of the tunnel. The Bank of Canada choosing to hold steady today is reassurance that you should continue to ride out this storm. Locking in now would merely ensure your rate will stay slightly below what you are currently paying for the next, 3, 4 or 5 years. Depending on how quickly rates drop, you could end up netting out on top staying put versus locking into something now – at the peak of the rate cycle.
Scenario #3: I need to consolidate and improve cashflow
Unsecured debt comes at a hefty price tag these days, especially if you’re on a floating rate. This has caused a cash crunch for many Canadians. If you’ve got home equity, a great solution is to consolidate.
One option is to do a complete refinance, but this moves your loan into the “uninsurable” category of mortgages, and means you’re looking at rate at least a half a point above an “insurable” rate. This is significantly better than the 21% you’re paying on your credit card – and is a great option for many people.
Another option is to add a line of credit. If the equity is there, we can transfer the term portion of your loan over to a new lender at an “insured” or “insurable” rate, then add on a Home Equity Line of Credit (HELOC) at prime +0.50%. This tactic allows you to keep a competitive fixed or adjustable rate on the amount you already owe, then borrow the additional funds you need on an ultra-competitive line of credit.
Consolidating high-interest debt into one low-rate HELOC can save you hundreds or even thousands of dollars per month. You can then use those savings to pay down the HELOC and actually put a dent in that debt and get ahead for a change.
The Bottom Line
There are many possible solutions to every home financing scenario. The best thing you can do is contact an experienced mortgage broker. They have expertise, insights, and most importantly, relationships with all kinds of financial institutions. Trust the professionals to provide the unbiased advice you need to make the best possible decision.