In the Market for a Mortgage? Choosing the Right Option can Save You Thousands!
– This is one of the most confusing times in recent history
for Canadians looking to acquire, renew or refinance a mortgage.
In addition to making sense of seesawing interest rates,
there are an incredible number of options to choose from
As a starting point, you have to decide if you want the stability of a fixed rate mortgage, or if you’re comfortable with the potential risks and rewards of a variable rate mortgage.
Over the past few years, interest rates have fallen to historically low levels and as a result, many Canadians are choosing the peace-of-mind of a fixed rate mortgage over the potential savings of a variable rate mortgage. However, confidence in the Canadian economy is putting pressure on longer-term interest rates, such as those for multi-year fixed rate mortgages. As a result, many Canadians are turning to variable rate mortgages as a more attractive short-term option.
“A variable rate mortgage is now around a full point (one per cent) cheaper than a fixed rate mortgage,” says Feisal Panjwani, senior mortgage consultant for Invis. “Because of the widening spread between short and long-term rates, even if interest rates rise, homeowners with a variable rate mortgage have an advantage.”
Purchase the house anyway and budget more carefully for the next few years? Buy the same house without the view and get it cheaper? Make a larger down payment by borrowing from your 401K or family members, so you get a lower payment? Get an adjustable rate mortgage with a smaller payment instead of a fixed rate loan? Or buy a smaller house and still get the view?
A variable rate mortgage allows the borrower to take advantage of low rates -- the interest rate is calculated on an ongoing basis at prime minus a set percentage. (Prime is the base rate that banks use in pricing loans to their best and most creditworthy customers.) For example, if the prime-lending rate of a bank is 4.50 per cent, the holder of a prime minus 0.50 per cent mortgage would pay a 4.00 per cent interest rate, until the prime rate changes.
Why choose a variable rate mortgage now? Consider the following:
A homeowner has $125,000 remaining on their $250,000 property loan and a 25-year amortization period. Their monthly payment is $716. Let's assume prime increases over the next five years to 5.75 per cent -- this equates to a 0.25 per cent increase per year (on average).
The homeowner takes a common variable rate mortgage at prime minus 0.60 per cent. By taking the variable mortgage instead of the comparable five-year fixed, the homeowner saves $3,129.
The homeowner’s outstanding balance at the end of five years: $110,371 with a fixed-rate mortgage at 4.85 per cent versus $107,243 with a variable-rate mortgage. Prime would have to increase to over 6.75 per cent in the next five years before variable rate mortgages become an unattractive option for homeowners.
“Yes, many Canadians simply prefer the greater sense of stability that a seven to 10-year fixed rate mortgage can provide in a changing rate market,” says Jim Rawson, regional sales manager,Invis. “Nevertheless, the advantages of a variable rate borrowing strategy are real: over the last 50 years, research shows consumers would have been better off by borrowing at prime rather than at a five-year fixed rate 88 per cent of the time.”
As Canada's largest independent mortgage brokerage firm, INVIS (www.invis.ca) works with homeowners across Canada to complete a financial analysis of their situation and determine which mortgage option is right for them.
Courtesy of ARA Content