Fixed Or Variable Rate Mortgage: What Should I Do?
As a mortgage broker in Toronto I receive calls from my clients and shoppers asking what to do in today’s market. After all, over the past 3 months alone mortgage rates have gone on a bit of a roller coaster ride.
I think variable is still the way to go. Here is why (DISCLAIMER: This is my opinion only. I am not offering financial advice. Everybody has different circumstances and mortgages are not one size fits all):
1. You will keep your mortgage payments low. The difference between the average variable rate in today market P+.50 (2.75%) and today’s average fixed rate mortgage (4.49%) is 1.74%. That translates into a difference of $231/month on a $250,000 mortgage amortized over 25 years.
2. If you are willing to pay the monthly payment of a fixed rate mortgage you can opt for the variable and take advantage of your ability to increase your monthly payment by 20%. All the extra money will go toward reducing the principal which will take months if not years off your mortgage and save you interest.
3. The Bank Of Canada has made a promise to Canadians that they will keep the prime rate level until the end of the second quarter of 2010. (Source)There is very little risk that your payments will increase over the next 12 months. With the economic outlook it appears that we may be a very long way away from inflation and recovery so the prime rate may stay low even longer. Lets just assume that you take variable for exactly one year and lock into a fixed 5 year at 5% for the remaining 5 years. The effective interest rate (average) still works out to be 4.53%.
4. Fixed rate mortgages are over priced. As I’ve explained in previous posts mortgage lenders determine their fixed rate prices by keeping a spread on current bond yields. When it comes to fixed rate mortgages you have “one bullet” to shoot. If you take a fixed today… thats it you forfeit the opportunity to do so in the future when rates are lower. By taking a variable you can stay in the game and lock-in in the future when rates are lower. This Toronto Star Article highlights the fact that fixed rate mortgages are over priced and that there is downwards pressure.
If you would like to discuss your particular situation or can’t make up your mind call our Toronto Mortgage office at 416.461.0204×2 and speak with Christopher Molder.
