THIS MONTH’S RATE UPDATES Fixed Rates
DROPPING
INCREASING
It is very important to understand how fixed rate penalties have increased due to the drop in rates. The penalty calculation is based on the difference between your rate and the current market rates. Since that spread has increased, so too will your mortgage penalty. We have been running scenarios on mortgage penalties and the cost of most penalties is between 500%-600% (in some cases 1,000%) more expensive than the 3-month interest penalty of taking a variable rate. As an example, a $500,000 mortgage may have a penalty of $19,350 instead of a 3-month interest penalty of approximately $2,487. One way to mitigate this risk is to go with a “non-bank” lender who has a much fairer calculation for their mortgage penalties. You can read more about the calculation of mortgage penalties here. Due to the potential Interest Rate Differential (i.e. IRD) penalties that may apply, we are warning our clients that if you take a long-term fixed rate mortgage, you need to be very sure that you will not be breaking your mortgage before the term is up. As a result of these IRD penalties, we are advising a large number of our clients to choose a variable right right now.
After an up and down year for rates throughout 2020, the past few months have shown a flattening in the curve. There is little movement expected in fixed rates for the next two years or so. Bonds have hovered around 0.4% for the past five months. A normal spread is 1.5%-1.8% above bonds. With insured mortgages available close to 1.5% and conventional mortgages just under 2%, we are not expecting much to change unless bond yields move (this is also unlikely with the government tightly controlling their purchasing of a significant number of bonds in the market right now).
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