Variable Rate, Fixed Rate or Both?
Aware of all the potential changes that are coming in the next few weeks and a strong realization of the material impact that they could have on the mortgage marketplace, there is great focus on and conversation about what mortgages should look like now and what the wise choices for consumers are.
Knowing that the odds are heavily stacked for a rate increase sooner rather than later, the real question comes down to locking in now, or choosing the variable rate option.
It seems, overwhelmingly, from those with their fingers on the pulse of the mortgage market, the answer is variable rate.
Just look at some of the facts. Last summer when the variable rate started to increase, the 5 year fixed rate was around 4.5% and people panicked as banks were advertising that they should lock in as rates are going up! Three months later the fixed rate was back down to 3.7% and the prime rate has not increased since then…all that happened was that banks profited by preying on people’s fears, consumers who took that bad advice lost out again. Plus, let’s not forget the 20% of consumers whose mortgages are renewing this year, in June 2006 they would have locked in at rates between 5.5% and 5.75% when prime was 6%. When they renew today they are ecstatic.
Bottom line…You save more money taking a variable rate mortgage – it’s that simple. If you are uncomfortable with the variable rate concept, spend some time and learn how to manage your mortgage on your terms. If you are willing to pay 4.5% for a fixed rate mortgage, set your variable payment at this amount and off you go. You will sleep well at night knowing that prime would need to go up .25% 10 times before you even hit that level and your payment never changes. In addition, while you are sleeping, you are paying down your mortgage at twice the level of a regular payment. You will find yourself thousands of dollars ahead of the game and you will be able to pay down your mortgage years ahead of schedule.
For me, taking a variable rate mortgage is not just a type of mortgage, it’s a strategy. The strategy is, we can afford payments on the 5 year fixed but if we take the variable and keep our payments the same as they would be on the 5 yr fixed we can save thousands of dollars in interest and over the long term, outperform the fixed rate. If you are employing this strategy and can afford an increase of up to 2% in rates then stick with the variable. It’s the right fit for you.
Most clients take the variable and then play ‘Russian roulette’ with fixed rates and timing when to lock in. If you are thinking of locking in at some point, I say that point is now. We’ve seen fixed rates start to rise. We know that the spreads are uncomfortably narrow and bond yields look like they may rise. These are all indicators that fixed mortgage rates are going up. We also expect the variable rate to rise by the end of 2011
Some Canadians prefer the peace of mind of a fixed-term mortgage, while others enjoy the flexibility of a variable mortgage, but the decision doesn’t have to be either/or. You wouldn’t invest all of your eggs in one basket, so why would you borrow that way?
Because of all the historical evidence of rate trends, and because of impact on long term savings for the client, suggests that there are problems inherent that approach; Many financial institutions promote this type of product and our answer to clients who ask about it is…it is like betting on both teams at the hockey game. You can’t win.