This article was written by Al & Tyler Trompetter, mortgage brokers, with Mortgage Architects. We thought it was so good, we asked them if we could share. Their contact is below, should you have further questions.
Rate Wars have been in news lately - over the last few days we’ve seen dramatic offerings as low at 1.15% below prime, all the while fixed rates continue to climb. As I’ve been getting a number of questions from my clients around Variable rates I thought I would put together the three biggest miss-conceptions around Variable rates in case you yourselves are faced with the question of “fixed vs variable.” For the most part, borrowers are afraid of Variable for three reasons: 1) Interest rate spiking without warning 2) Rate doubling overnight3) Monthly payment doubling overnight. All of these three “worries” cannot happen. Here’s why: 1) Interest Rate Spiking Randomly - This can't happen, in fact "Prime rate" is determined by eight pre-scheduled Bank of Canada meetings at which the decision is made whether to move the Prime lending rate or not. Rates only move up with consistent positive economic news. 2) Rate doubling overnight - In fact interest rates are unlikely to move by more than .25% following any given meeting. This amounts to $13 for every $100k borrowed on your monthly payment, hardly the end of the world given the discount variables are currently offered at. 3) Monthly Payment Doubling overnight - This also cannot happen. As illustrated in point 2, the change in monthly payment is quite nominal. As well, certain lenders offer a ‘fixed payment’ option – whereby no matter where Prime moves your payment remains constant for the 60-month term, so your insulated from that risk. One final Pro-Variable comment: Penalties. Variable rate mortgages come with the massive advantage of breaking the mortgage with only a 3 month interest penalty, which usually works out to ~.50% of your mortgage balance, compared to 4.5% of your mortgage balance on a fixed rate from one of the ‘Big Five’ banks. Given 60% of Canadian’s break their mortgage at the 34 month mark and that can be significant to any homeowner. As always – any questions please let us know.