Did you know, there are Canadians out there right now, paying 2% interest on their mortgage? It’s true. Not long ago, many banks were offering Prime minus 1% for variable rate mortgages. Don’t rush to your bank to switch your rate just yet. The current variable offers are Prime plus 1 – 2%. Let’s face it; your bank has to make some money too.
People become quite passionate about mortgage rates. You hear compelling arguments for both variable and fixed. Hey, even husbands and wives have gone to battle over rates. A little education in the mortgage rate department will go a long way to help you make that oh-so-important decision.
Lesson One: Stop thinking about your rate in a 25-year term! “Term” refers to the length of time your interest rate is set for, most commonly, five years. Variable rates are typically five years, but fixed rates can go as high as 10 years. “Amortization” is the length of time it will take to pay off the loan. The standard is 25 years. Within those 25 years, you must renew your interest rate at the end of each term. So, just because you’re paying 4% now, doesn’t mean you’ll get 4% again when the term is over (renewal). Rates could be lower or higher, depending on the economy. There’s no point in doing the math for 25 years, if you only have a five-year term.
Lesson Two: Understand what variable and fixed rates are. I’ve met too many people who proudly boast having 4.3%, because they went variable. With a little prodding, I usually discover, 4.3% was the variable rate when they applied for their mortgage. They always look a little stunned when I ask what they are paying now.
Variable, by definition, means the rate will vary. It’s based on prime, so as prime changes, the rate changes. If your variable rate is set at prime plus 1%, then currently, with prime at 3%, you’ll pay 4%. If prime goes down 2.5%, you’ll go to 3.5%. However, if prime goes up to 5.5%, you will pay 6.5%. Fixed rates, on the other hand, stay the same for the length of the term. Generally, the longer the term, the higher the rate. Therefore, if you’re offered 5% fixed on a 7-year term, you’ll pay 5% for the whole 7 years with no fluctuation.
Lesson Three: Don’t listen to anybody else! Not your neighbours, your parents or your friends. Do a little soul searching. Can you handle a bumpy rate ride? Will you kick yourself if prime goes down? Do you need the comfort of stability or are you a risk taker? Would you rather lock in for 10 years so you can start a family?
While others may give well-intentioned advice, the choice of a variable or fixed mortgage rate is yours alone. Educate yourself, and make a choice you can live with.
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Agreed people need to look at the facts and make up their own minds. But unless you know you are going to sell the house in a short time, I think you are crazy not to go with a fixed rate mortgage.