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| Mortgage rates historical trends (Photo credit: Wikipedia) |
The benefits of a fixed rate is simple: you know exactly what you're going to be paying for the term of the mortgage. It's the secure choice. Draw backs of fixed is that you will generally pay more (statistically 88% of the time). You'll also qualify for more money with a five year fixed because we use the actual rate to qualify you. Variables and shorter term loans use the Bank of Canada five year posted rate which is about 2% higher.
The benefit of a variable is exactly the reverse: you generally pay less but you're gambling with the rates. This becomes a safer bet if you have a good working knowledge of the world economy (or you have a stellar broker like me to advise you:) A second benefit of a variable is there's no Interest Rate Differential which can cause those really big penalties if you pay it out early. It'll just be a straight three months interest.
When choosing a mortgage it's important to consider several things. First of all, how long before you plan to sell or refinance. If you're going to sell in one year there's no point in a five year fixed. A shorter term or a variable would be more appropriate or even an open mortgage (no penalties but higher rate) if you're going to sell within a few months.
Let's assume you're going to keep your house for at least five years. There are three things I consider when deciding what to recommend to a client: one is the spread between fixed and variable. Right now it's only about a tenth of a percent so there's not much savings there. Normally the spread is closer to 1.5% which makes a much bigger difference.
The second thing I consider is where are rates going. At the time I'm writing this I expect rates to stay low for two to three more years and then start rising. With very little spread it would only take a single rate hike to undo any savings with the variable.
The third factor is how well can my clients handle a fluctuating payment. If the payment goes up significantly do they have a savings account or liquid investments to tap into if they get in trouble? Have they bought less than they can afford or are they maxing out their income. The more secure your financial situation the more you can afford to gamble with saving money.
Another strategy that I like is the one year fixed strategy. This allows you the flexibility to renew, refinance or sell every year without penalty. You get rates that are closer (or lower) than variable rates and it provides a lot of flexibility. It doesn't have the stablity of the five year fixed but it's a highly flexible option that I like especially for investment properties.
And for all you fence-sitters out there, you can enjoy a 50/50 mortgage where half the balance is in a five year fixed and half is in a five year variable.
If you have any questions about your own situation and what would best suit your needs, please call me. I am always happy to discuss your options. And remember, my services are free.
