It is true that fixed rates offer some longer-term deals if rates go up but are they going up anytime soon? No one truly knows, economics have been wrong for the last 5 years. So why should we believe them now? While it’s true that the economy will eventually get stronger, we’re still a long way from the “perfect storm” to make that happen.
One issue when trying to sort out the facts is that Canadian banks make higher profits on a fixed rate mortgage. So you’ll typically see them promoting fixed rates in the press. Just this week Bank of Montreal released a study touting the advantages of fixed rates but supported their case with weak statistics. Unfortunately they used posted rates to compare against the variable, no one pays posted rates anymore? I would have to hope that consumers are negotiating a discount or have a broker working for them in this day & age.
The other factor that banks fail to highlight is the flexibility that a variable mortgage offers. By default the pre-payment penalty a Barrie home owner pays when breaking a variable mortgage is only 3 months interest. This is a nominal expense when compared to Interest Rate Differential or IRD pre-payment penalty which could be potentially imposed when paying out a fixed mortgage early. An IRD penalty is a calculation used if rates have dropped after you’ve locked. The lender will charge you the difference between your rate & the new lower rate through to the end of your term. These penalties can run into the 10’s of thousands, depending on the size of your mortgage principle & the difference in the two rates. So if you have the potential of refinancing, dramatic life event or moving in the near future, beware!
So I’m moving forward with a variable rate mortgage?
There are two other issues to be aware of once you’ve chosen a variable mortgage. The first is converting it to a fixed rate when the prime bank rate starts to rise. Many Barrie home owners don’t realize that fixed & variable rates don’t have the interest rate driver. Fixed rates rise & fall with the bond market, while variable rates are directly tied to the Bank of Canada’s prime bank rate. The bond market normally builds in anticipation to the prime bank rate, so by the time you hear that the Bank of Canada have raised rates it may be too late to take advantage of interest savings by converting your mortgage to a fixed rate. The second it to clarify with your lender which fixed rate you can convert to? Many of the bank don’t covert you at their best discounted rate, instead they will lock you in at their post rate or something in between. Remember, at this stage you’re in the middle of you mortgage term so you have very little negotiating power. My advice, you’re likely best to stick to a variable throughout the term unless the economy looks as though it’s going to be “red hot”.
Using a Mortgage Broker
So take advantage of the “free” tools you have available to you, use a Barrie Mortgage Broker. A Broker can shop the market for you, not only finding you the best available rate & features for you but also look at the “fine print” in the terms & conditions to ensure you’re not signing something you’ll regret.
Don’t hesitate to contact me for a more detailed explanation of one of the above topics [(705) 737-6161] or better yet, set an appointment at my Barrie office (99 Bayfield St.) to completely review your mortgage scenario.