Fixed Rate vs Variable Rate Mortgages
Your Fort McMurray Mortgage Broker Jodi Whalen gives tips on fixed and variable rate mortgages.
You may want to determine if a fixed or variable rate mortgage is the best option for your situation.
Is a variable rate mortgage something you can afford?
It can be risky to take a variable mortgage if you do not position yourself to have extra funds available should the rates go up. One thing you can do to mitigate the risk of rising rates is to fix your payment at a set amount higher than the minimum requirement. You can set your payments to that of the five year fixed so if rates go up you are prepared to pay the higher amount. Setting your payments higher will also allow you to pay more towards the principle lowering your mortgage amortization and allowing you to pay your mortgage off early. You can also save the remaining funds in the bank or a savings account to collect interest on the money, but knowing it is available if the rate did rise. We are your trusted Fort McMurray Mortgage Specialist/Brokers.
Does your risk profile fit a variable mortgage?
Once you have decided you can afford a variable rate mortgage the next thing you will want to see if a variable rate mortgage fits your personality, lifestyle and comfort zone. If you 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. Studies show that the variable rate mortgage wins over the fixed rate mortgage. Remember though no one can predict where rates are going to be with any certainty and none of the economists making predictions will pay your mortgage, this is something you need to plan for and have savings so if rates go up you can afford the higher payment.
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 jump 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 the variable rate mortgage holds the lower interest rate and most certainly the lowest penalty being only 3 months interest at anytime 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. The big banks have posted rates and give you discounted rates however the posted rates are what they use in calculating the interest rate differential which result in way higher penalties. The penalties are 4 times the amount compared to a financial institution which does not have posted rates resulting in a lower spread on the interest rate differential penalty.
What are things to consider with a variable rate mortgage?
Frequency of the payments
Check out the payment frequency options at each lender to make sure they allow the payment frequency you want. Some lenders do not have non-accelerated monthly payments. Some lenders do not change your payments when prime rises or lowers this could make your amortization extend longer then it would with the prime rate increase and payment increase to reflect the increase. As a Fort McMurray mortgage broker I will make sure you are aware of the options and variable product you are getting with the lender or bank we choose.
Conversion to fixed rate
Does the Fort McMurray mortgage lender allow the mortgage to be converted to a fixed rate mortgage at any time? If so what rate will they give you when you jump to a fixed? Will you get the posted inflated rates or the low discounted rates? Remember once you are in a closed variable mortgage the lender or bank does not have to give you the best rates. 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 Fort McMurray. I will inform you on all your options so you can make sure 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 Fort McMurray 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.