It’s official. Last week, the major banks raised mortgage rates — 60 basis points for a five-year fixed to 5.85 per cent from 5.25 per cent. Variable rate holders are quaking. Do you lock in, hold your breath and pray, downsize to delightful Musquodoboit Harbour?
Panic not. June 1 is the consensus pick by the pundits for the central bank to increase interest rates. But I doubt we are going to see precipitous rises to match the fall-off-a-cliff prime rate decline from 6.25 per cent at the end of 2007 to 2.25 per cent in early 2009. So there will likely be time to prepare and consider.
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If you are one of the lucky ones with a variable rate pegged a certain percentage below prime — some are as much as 1 per cent — you still have lots of cushion. Even if you didn’t crack such a yummy deal, any variable rate pegged at a quarter to half over prime or less is one you want to hold on to.
Interest rates could certainly rise by a couple of percentage points in the future if the Consumer Price Index (CPI) keeps increasing. But if your term has a couple of years or more remaining, then you will still be saving on interest costs with a variable rate. Of course, you do risk renewing your mortgage at a higher rate than if you had locked in now.
Fixed or variable the best way to protect yourself is to pay down your mortgage while you have the most advantageous rate. The more you take off the principal the less exposed you are to higher rates in the future.
One reader is attacking her mortgage by cancelling Internet and cable TV service — neither of which she uses much since she leads a busy life. And she intends to get rid of her cellphone when the contract comes due shortly and (this is huge) do her own manicures. The $185 a month saved will nicely speed her mortgage on its way.
– Alison Griffiths is a financial journalist, author and host of Maxed Out on the W Network. Write to her at email@example.com.