The following are some things you will want to consider when evaluating your options between fixed and variable rate mortgage products.
Can you afford to take a variable rate mortgage?
There is some risk associated with a variable rate mortgage; you need to assess your ability to service the mortgage in the event that rates do rise. One of the things you can do to mitigate the risk of rising rates is to fix your payment at a set amount higher than the minimum requirement. For example, setting your payments based on the current five year fixed rate will allow you to provide a buffer in the event that rates rise. Setting your payments higher will also allow you to further take advantage of the lower variable rate by allocating more of your payment to pay down the principal.
Does a variable rate mortgage fit your risk profile?
Once you have decided you can afford a variable rate mortgage the next thing you will want to assess is if a variable rate mortgage fits your personality, lifestyle and comfort zone. If you are the type that can’t sleep at night knowing that your rate may change by .25% then a variable rate mortgage may not be the best option for you. Many studies suggest that from a historical perspective a variable rate is a good bet. Just keep in mind that no one can predict where rates are going to be with any certainty and none of the economists who make the predictions will be making your mortgage payments.
Variable rates can change every 6 weeks determined by the Bank of Canada and follow the economy. When the economy is doing well it could go up and if the economy is not doing well it could go down. You can always go from a variable to a fixed rate mortgage at the existing term without a penalty for example 1 year into a 5 year variable you can jump into a 4 year fixed. You can not go from a fixed to a variable rate mortgage without a penalty.
Historically speaking usually the variable rate holds the lower interest rate and most certainly the lowest penalty should you break the mortgage before the end of your term. If you sell your home and pay out your mortgage or want to change lenders with a variable the penalty is only 3 months interest. It is very transparent and this is one of the best things about the variable mortgage. It is usually one fourth the amount of a penalty compared to a fixed rate mortgage which is calculated off the interest rate differential spread or 3 months interest whichever is great. In most cases the interest rate differential is way higher then the 3 months interest penalty.
What should I look for when choosing a Variable Rate Mortgage?
Make sure you are aware of the options available before deciding. Some lenders may not allow certain variations of payment frequency.
Conversion to fixed rate
Does the lender allow the mortgage to be converted to a fixed rate mortgage at any time? If so what rate are you guaranteed on conversion? Will you get their best-discounted rate or their posted rates? Remember, if you are in a closed mortgage you will not have any negotiating power.
If your mortgage is at a big bank it will likely use posted rate when converting from a variable to a fixed rate and may not offer the lowest rate out there. Make sure you call me to discuss your options and get a second opinion before converting to a fixed rate to make sure you are getting the lowest interest rate for your mortgage in Grande Prairie. I will inform you on all your options so you can verify you are getting the best offer from your bank. If they can not be upfront and offer you the lowest rate I would love to get you a better option for your mortgage lending needs. I will make sure we get you a mortgage that works best for you! My job is to understand all the lenders and the products they offer, I explain all this to you and you pick your lender or bank.
Another reason fixed rates can hold a big penalty is posted rates. What are posted rates? When you go to your bank and see a 5 year fixed posted rate of 4.99% but they offer you a discounted rate of 3.34% this is an example of posted rate. The 3 year posted rate is 3.64% this is a 1.35% spread if your mortgage is $500,000 balance the interest rate differential would be $500,000 x .0135 spread =6750 x 3 years outstanding = $20,250 penalty. This would be a penalty on a $500,000 dollar mortgage paid out 3 years early on a 5 year fixed product at a big bank. The same penalty on a variable would be 1016 interest monthly x 3 months = $3048 penalty at anytime within the 5 years paid out early.
We have other lenders that are not the big banks that have lower penalties on a fixed rate product compared to the bank does as they do not have posted rates. They offer you the lowest rate upfront when converting from a variable to a fixed rate mortgage and on renewal they also offer the lowest mortgage rate. Unlike banks they do not have a posted rate and then offer discounted rates. Therefore the penalties on a fixed rate at a non-bank lender have smaller fees then a big bank due to not having posted rates.
I will inform you on all your options so you can verify you are getting the best offer from your bank. If they can not be upfront and offer you the lowest rate I would love to get you a better option for your mortgage lending needs. I will make sure we get you a mortgage that works best for you! My job is to understand all the lenders and the products they offer, I explain all this to you and you pick your lender or bank.