Understanding The Difference Of A Fixed or Variable Mortgage!
Are you debating between a variable rate and fixed rate mortgage? Here are a few questions you need to ask yourself to determine which mortgage product is right for you.
Can You Afford a Variable Rate Mortgage?
Don’t use the low mortgage rate quoted for a variable rate mortgage today as the reason for selecting it. If mortgage rates go up, so will your mortgage rate. Instead, look at whether or not you could afford a variable rate mortgage if mortgage rates go up. Then balance the savings of today’s low interest rate against what you’d pay if mortgage rates rise.
You can mitigate the risk by fixing your payment at an amount higher than the minimum you’d have to pay if mortgage rates rise. This means you’re paying more than the current interest rate and can afford a higher interest payment. This gives you a buffer if interest rates rise, and it helps you make progress against the loan balance. You’ll be paying more of the principle each month, and that will lower the loan balance on which interest would be charged if interest rates go up.
Can You Tolerate the Risks that Come with Variable Rate Mortgages?
Someone’s risk profile is how much risk they’re willing to tolerate. If you will live in fear of interest rates rising or you experience an emotional roller coaster as investments rise and fall, you’d be better off getting a fixed rate mortgage. Then you know what your mortgage payments will be. You’ll pay more than you would if interest rates were low, but you won’t have to be afraid, either. You can manage the risk by securing a variable rate mortgage with a minimum payment well above the minimum payment, but there is still the risk that the payment will go up. If you have the discipline of paying more every month and foresight to secure a variable rate mortgage that won’t penalize prepayments on the mortgage principle, you could make more progress paying down the loan than you would with a fixed rate mortgage. And you’d be able to take advantage of our historically low interest rates.
What if you’re annoyed by changes in what you have to pay each month? Variable rate mortgages could change every six weeks based on the Bank of Canada’s decisions. If you prefer to pay the same amount every month for your utilities and subscriptions, this uncertainty means a variable rate mortgage isn’t right for you.
Variable rate mortgages give you the option of paying less now in the hope that you can refinance into a five year variable mortgage or four year fixed mortgage. If you’re willing to take the risk rates will go up when you decide to lock in a mortgage interest rate, you could secure a variable interest rate mortgage now and switch to a fixed rate later with no penalty. If you sell the house or switch mortgage lenders, you’ll only have to pay a three month interest penalty with a variable rate mortgage. That’s one of the best things about variable rate mortgages – the interest penalties are transparent and the loans can switch to a fixed anytime with no penalty. The fact that the penalty is a quarter of what you’d pay for switching to a fixed rate mortgage is a bonus.
Know the payment frequency before you sign up for a variable rate mortgage. Some lenders will require you to make payments on the same interval. This means that once you sign up for a monthly payment, there’s no chance of switching to a biweekly schedule. This is very rate but something to consider.
Conversion to a Fixed Rate Mortgage
We mentioned that you can switch to a fixed rate mortgage. However, some lenders allow you to do this at any time at no additional cost. Others require you to pay a fee to do so, even if you’re renewing the mortgage with them. Another factor to consider is the interest rate you’d pay when you convert to a fixed rate mortgage. Would you get their best, discounted rate, or would you pay the higher posted rate? If you take out a variable rate mortgage with a big bank, they’ll probably use the posted rate during this conversion. If you’re considering converting your variable rate mortgage to a fixed rate mortgage, talk to your Grande Prairie mortgage brokers at Whalen Mortgages Grande Prairie to understand your options. You will probably qualify for a lower interest rate with someone else, but you will lose money if you don’t even investigate your options and miss out on a better deal. And if you confirm that your bank is offering you the lowest interest rate, you’ll enjoy peace of mind.
Another factor to consider are the penalties you’ll pay when you convert from a variable to a fixed rate mortgage. Fixed rate mortgages can hold a big penalty for big banks who have posted interest rates higher than the actual rate they offer. What are posted interest rates? When you walk into the bank, they may have signs advertising a 5 year fixed posted interest rate of 4.99%, but they offer you a discounted mortgage of 3.34% as a long-time customer. In this example, the three year posted rate of 3.64% results in a 1.35% spread if you have a half million dollar mortgage. The interest rate differential in this case would be $500,000 multiplied by 0.0135 spread. The penalty would be $6750 multiplied by three years left on the loan, resulting in a $20,250 penalty. That money is owed when you refinance the loan with three years left on a five year fixed mortgage at a big bank. If you had a variable rate mortgage with the same interest rate and mortgage balance, the penalty would be $1,016 of interest times three months. This equals a $3048 interest penalty paid when you refinance the loan with a variable rate. Not only is the penalty far lower, but it is constant. You’d owe that same penalty where you refinanced in year one or year three. Note that the penalties and fees you’d be charged vary between lenders.
Whalen Mortgages Grande Prairie works with lenders who are not affiliated with the big banks. They offer lower penalties on fixed rate mortgage products when you’re converting as they do not have posted rates like the big banks. And they may do that on top of offering low mortgage rates. They can do this because they don’t have a posted rate, so they can offer discounted rates to everyone.
Talk to a Grande Prairie mortgage broker like Whalen Mortgages so that you can verify that you’re getting the best offer from your bank or get a better one from another lender. We’ll make sure you get a mortgage that is right for you.