Mortgage Matters: Variable or fixed and why?
Mortgage Matters: Variable or fixed and why?By Bob Quinlan
Thursday, March 05, 2009 03:56 AM
By Bob Quinlan
As of Tuesday, March 3rd, 2009, the Bank of Canada has once again made a massive reduction to its overnight lending rate (0.5%). Many of the banks/lenders have in turn passed that reduction on by reducing their prime rate by the same amount to 2.50%. The question is more relevant: should I go fixed or variable?
In making your decision, there are a number of things you should consider:
Do you have the mindset to let your rate float with the market?
Are you concerned about the negative possibilities of prime increasing and your mortgage being caught in higher rates before you have the chance to lock in and save?
Before making your decision you should also consider a couple of things:
The main reason you would choose a variable rate is because you will be saving a lot now on a 5-year term while fixed rates are falling and you lock in later at a fixed rate that is lower than today. e.g. prime + .80% = 3.3% vs. 5-year fixed @ 4.29% ($165/month on a balance of $200,000)
Prime rate is not going to skyrocket over night. In fact most predictions are that prime will remain where it is at the highest for the rest of 2009. In the meantime, fixed rates should remain the same at worst or even fall. The economy has to improve for rates to start to rise. In other words, the demand for borrowing has to increase and by that I mean “qualified borrowers”. “Qualified” is defined by the market terms and I discuss that at great length in my previous comments.
Bob Quinlan is a Mortgage Broker with Mortgage Alliance Prince George, you can reach him by email :bob@pgmortgages.ca or by calling the office at 250-564-9161
· Even if borrowing rates were to start to rise, you as a borrower would not be able to avoid the warnings in the news. It’s kind of like when you buy a new vehicle. Once you start driving it on the road you notice all the other vehicles like yours. If you put your house up for sale you suddenly notice all the signs of other homes for sale and the advertising offering the same. When anyone is in a variable rate mortgage they are keenly aware of all the stories in the media not to mention the comments from their friends and colleagues who are interested in the same.
The important decision is to choose a lender that offers you the option to make that decision to lock at no charge and on the same day. Choose a representative who will be able to keep you informed of the current rates and your options. Someone who is available to make it happened without delay. Also, when you are looking at variable rates, take a look at that lenders fixed rates and how they compare to those of the competitors. The main reason you would choose a variable rate is because you are going to lock in somewhere down the road. These low rates are not going to remain over the entire 5-year term of your mortgage. Some lenders may offer attractive variable rate options only to have limited fixed rate choices when you go to lock in.
Also consider the future options such as Portability, Assumability, pre-payment options, etc. Each factor may have a bearing on who you place your mortgage with. Remember the actual description of the mortgage transaction: The borrower is the mortgagor. That means that the borrower provides a mortgage to the lender as security in return for the funds that the mortgagee (lender) offers. This is a mutually beneficial transaction that provides requirements for both parties to live up to.
Most people who are not comfortable with variable rate choices are not familiar with the details. Before choosing, make sure you clearly understand the benefits of either choice. A 30-minute meeting with your representative can easily save you as much as $1,000. Is that worth your time?
posted by Colin @ 8:46 AM
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