ERICA ALINI– The Globe and Mail
So how can home buyers and owners hedge their interest-rate risk?
Here are four strategies mortgage experts point to.
Use multiple rate holds
With a mortgage pre-approval, lenders guarantee a given fixed rate on a new mortgage for up to 120 days. Getting a rate hold early protects you against any temporary increases that may happen before you sign off on your new mortgage, said James Laird, co-chief executive officer of financial products comparison site Ratehub.ca and president of mortgage lender CanWise.
Even better, if rates decline before your renewal date, there is no commitment to stick with the rate that’s being held, Mr. Laird added. Instead, you can ask for another hold on those lower rates. Borrowers can have multiple holds at different lenders, he said.
“There really is no downside risk to getting rates held for yourself early and often,” Mr. Laird said.
Go variable
Opting for a variable-rate mortgage eliminates the risk you’ll be stuck with a high mortgage rate as borrowing costs fall, but you’ll face the uncertainty of how long rates will remain at elevated levels.
That’s not to mention the fact that variable-rate mortgages right now are generally higher than what lenders are charging on fixed-rate loans. This week, for example, the lowest nationally available variable rate on loans that don’t require default insurance is 6.55 per cent, compared with 5.34 per cent for a five-year fixed rate, according to MortgageLogic.news, an industry bulletin run by Mr. McLister.
Finally, there’s also the risk that rates will climb further. Mr. McLister points to an early December estimate by Harvard economist Jason Furman that there was then a 25-per-cent change that inflation will reignite in the U.S. A considerable reacceleration of consumer prices growth in North America would lead to further hikes in the U.S. and Canada, Mr. McLister cautioned.
Going variable makes sense “assuming you can handle the risk of being wrong,” he said.
Choose a short-term fixed rate
If you need a new mortgage now but believe rates will fall in the near future you could also lock into a one-year fixed rate, Mr. McLister said.
Such rates are currently significantly higher than those on mortgages with terms of five years. But if rates do decline over the course of the year, “then paying more for a one-year fixed mathematically works out better than locking yourself into a five year fix,” he added.
Go hybrid
Another option is to choose a hybrid mortgage, or what Mr. McLister calls “rate diversification.” This lets you split your loan into two or more portions tied to variable as well as fixed rates.
The variable-rate part allows you to take advantage of lower borrowing costs if rates fall.
The fixed-rate portion limits your risk should rates move in the opposite direction.
Summarized by:
Kelly MioBertolo
Mortgage Alliance
