Should I Switch from a Variable to a Fixed Mortgage?
Should you lock in a fixed-rate mortgage? Both variable and fixed-rate mortgages have their pros and cons. Which one is best really depends on the market and your personal situation.
For the best advice about switching from a variable to a fixed mortgage, always contact your mortgage broker.
Key Takeaways
To switch from a variable to a fixed rate you can lock in at your current lender or requalify to switch to a new lender.
Switching from a variable to a fixed mortgage can provide stability and predictability, but it may not be the best choice for everyone.
Factors to consider when making the switch include your financial situation, future plans, and market trends.
Rates can change from week to week, so always make this decision in partnership with your mortgage broker.
How to Get a Fixed Rate
There are 2 options to get your hands on a fixed rate:
Lock in with your current lender
Requalify and lock in with a new lender
Lock in with Your Current Lender
In most cases, you should be able to lock your variable rate into a fixed rate at your current mortgage lender without penalty. To simply lock in, call your lender and ask for some rate quotes for the terms available to you.
You will need to lock into a fixed rate that is a term equal to or greater than your remaining variable rate term. Before signing on the dotted line with your current lender, make sure to check in with your mortgage broker and determine if your lender is offering you a fair rate.
Lock in with a New Lender
If your current lender isn’t offering you the best market rates for fixing your mortgage, you may decide to change lenders. To change lenders and obtain a fixed rate, you will need to qualify for the new loan.
You will need to provide your mortgage broker with updated documentation regarding the property, your income and your debts. If you have had significant changes to your income, you may no longer qualify for the loan and you may be forced to lock in with the current lender.
When switching lenders, you are likely to have a payout penalty. Understand these numbers to make the best decision for your family. Evaluate the options available with your mortgage broker before pulling the trigger on a switch to a new lender.
Factors to Consider When Switching
Market Trends & Interest Rates
Before making a decision, it's important to understand the current market trends. If interest rates are expected to rise in the near future, then it may be a good idea to switch to a fixed-rate mortgage to lock in a lower interest rate.
On the other hand, if interest rates are expected to remain stable or even decrease, then it may be better to stick with your variable-rate mortgage.
In addition to contacting your mortgage broker about upcoming rate changes, you can also look at the Canada Bond Yield Chart and Bank of Canada announcements.
Looking at these resources will show you how interest rates have changed over time. If the Bank of Canada has been consistently raising interest rates, then that’s a sign they could continue to do so.
Future Plans
Another important factor to consider is your future plans. If you plan on staying in your home for a long time, then switching to a variable-rate mortgage may be a good option.
Historically speaking, people who stick with a variable mortgage end up saving money over the entire 25-30 years of their mortgage. That said, there might be 5-year terms within those 25-30 years where you end up paying more with a variable rate than a fixed rate.
However, if you plan on moving and selling your house in the near future, it might not make sense to switch at all until you purchase your new house.
If you’re planning on renting out your house, then switching from a variable rate to a fixed rate might make sense. Consistent mortgage payments mean you’ll be able to predict your cash flow from your rental more accurately.
Financial Stability
Your financial stability plays a big role when deciding whether to switch from a variable-rate mortgage to a fixed-rate one. If you can afford to have your mortgage payments increase by a few hundred dollars each month, then a variable rate could work for you.
However, if your income is variable or you anticipate any financial instability in the near future, then a fixed-rate mortgage may be a better choice, as it can offer you consistency in your mortgage payments.
Loan Term
Another factor to consider is your loan term and how much time is left on your term. If switching from a variable rate to a fixed rate means that you need to take a long-term fixed-rate mortgage, this may not be right for you. To have access to the full gamut of loan terms, you may need to switch lenders.
Speak to your mortgage broker to determine all loan terms available if you’re switching from a variable to a fixed so that you don’t lock in longer than you need to.
Payout Penalties
When you’re breaking your current mortgage to lock in your fixed-rate at a new lender, you will need to consider that you will have to pay a payout penalty. In most cases, variable-rate mortgages come with a 3-month interest payout penalty.
Make sure to understand the fine print on your mortgage. If your mortgage comes with a 3% break fee, the numbers might not make sense. If your mortgage includes a bona fide sales clause, switching lenders mid-term will not be possible.
Pros and Cons of Switching
Advantages of Fixed Rates
Switching from a variable to a fixed mortgage rate has some advantages. A fixed-rate mortgage can provide you with a sense of security because your interest rate remains the same throughout the term of your mortgage.
Fixed-rate mortgages are predictable, which means that you can budget accordingly and plan for your future payments. On a fixed-rate mortgage, your payments will be the same every month, regardless of interest rate changes.
Disadvantages of Fixed Rates
There are also some disadvantages to switching from a variable to a fixed mortgage rate. Fixed-rate mortgages typically have higher payout penalties than variable-rate mortgages. When you “break” or pre-pay a fixed rate mortgage the payout penalty will default to the greater of the interest rate differential or 3 months interest.
Another drawback of fixed rates is if interest rates decrease, then your payments will not decrease, like they would with a variable rate.
How to Make the Switch
Read our full blog on how to switch from a variable to a fixed-rate mortgage.
Consult a Mortgage Broker
Before you make any decisions, it's a good idea to consult with a mortgage broker. They can help you evaluate your options and determine if switching to a fixed-rate mortgage is the right choice for you. They can also help you find the best rates and terms available.
Evaluate Offers
Once you've decided to switch to a fixed-rate mortgage, it's important to evaluate your options carefully. Look for the best rates and terms available, and consider any fees or penalties associated with closing your old mortgage and opening a new one.
You may also want to consider the length of the term and whether it aligns with your financial goals and future plans.
So, Should You Switch to a Fixed-Rate Mortgage?
Deciding whether to switch from a variable to a fixed mortgage can be a challenging decision. The right answer can change from week to week, depending on market trends.
That’s why it’s essential to make this decision with your mortgage broker. For the most up-to-date advice on switching from a variable to a fixed mortgage, contact Spire Mortgage.
