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As discussed in last month's
issue of our newsletter, the most common question we hear as a
mortgage broker is "where are mortgage rates headed"? Easily,
the next most common question is; "fixed or variable - which
is my best option?" An easy question should provide an easy
answer right? Well, there's a lot to consider on the clients
behalf. The difference between a fixed and a variable rate is
like trying to compare apples to oranges. They both serve a
different function from one another.
When dealing with Variable
Rate Mortgages (VRM), the idea of a "set payment" plan is not
the intent. The intent is to "float" an interest rate
according to what the prime rate of Canada is doing. We know
that with experiencing historically low interest rates, that a
VRM has very beneficial factors. With the Prime Rate of Canada
being at 4.25% today, and lenders being competitive in
offering below prime rates in the products they offer, a
variable rate mortgage seems easily justified.
Today's most common variable
rate mortgage has an interest rate of .80% below prime on a
five-year term! Yes, that 3.45% as a monthly payment!
Take a mortgage of $150,000 and today's VRM rate of 3.45%. On
a monthly basis your payment is $744.95. Not bad. In fact it's
very, very good.
Herein lies the question;
"why isn't EVERYONE taking a variable rate mortgage"? Seems
simple enough, the prime rate of Canada stays low, and my
interest payments stay low as well. Ah - HA! There's no
guarantee that we will stay at these "all time lows" in
interest rates. However, all hope in security is not lost when
choosing this type of mortgage. The lenders have a "lock in"
feature set up within this program that allows you to lock in
to their fixed rate mortgage at any time, without penalty.
Hey, not bad. It is typical for the banks to set the payment
at each month. So, that is to say that if your payment at the
start of the month was based on a 3.45% interest rate, it will
stay that way until it is set again the following month.
What about prepayment
options and prepayment penalties? Usually you can find a bank
that will allow prepayment options attached to their variable
rate products. If you decide to set your payments to reflect a
higher interest rate, the difference between the two payments
goes directly to your principle each month. Even better. That
has potential to save you YEARS off the amortization of your
mortgage.
The prepayment penalty for a
variable rate mortgage (breaking the mortgage), is
three-months interest payments. When trying to decipher how a
VRM works, think of a mutual fund. Your payments can fluctuate
from month to month. Although you are floating below prime,
there is no set payment from month to month.
A fixed rate mortgage (or
commonly referred to as a "closed" mortgage), is set up so
that you have "fixed" payments at every month (or bi-weekly,
etc.). There is no guessing as to what your next mortgage
payment is going to be from month to month. For example, you
have a $150,000 mortgage and you have an interest rate of
5.00% over a 5 year fixed term. You know that if you pay the
minimum payment per month, your payments will be $872.41
(principle and interest only) for the next five years. That's
the security of having a fixed rate.
This type of mortgage may be
most attractive for the client who may have a set income;
example a pensioner, or a disability fixed income. The fixed
rate mortgage is also designed for security in knowing a
payment structure and for the purpose of piece of mind.
As far as deciding what's
best for YOU, there's no right or wrong answer! It all depends
on a risk and security factor that you're comfortable with.
Everyone has their own idea of "how to get ahead of the game",
and how their monthly finances work within their household.
Talking to us just may help you find your strategy in YOUR
game.
Sincerely,
DAN MASS, Mortgage
Agent
700-4th Avenue
SW
Calgary, Alberta, Canada
direct:
403.294.0033 cell: 403.710.1505 fax:
1-866-902-4910
email: dan@canadafirstmortgage.com
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