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A variable rate or fixed?
Mar 29, 2018
Why you might want to consider a variable rate mortgage
If you are a nervous first time home buyer or just holding things together financially as you renew the safe choice is to lock down a rate for five years.
Everyone else, consider a variable – rate option. Although you are exposed to a rising interest rate, variable-rate mortgages can be cheaper in two important ways.
Currently, a discounted variable – rate mortgage can be had for 2.4 per cent as opposed to a fixed rate mortgage bottoming out at 3.19 per cent. With a maximum spread
of 0.79 percentage points this offsets three increases in the Bank of Canada’s rate. The central bank could possibly raise rates by more than .25 but it would be unususal.
It can also be cheaper to opt out of your loan than with a fixed rate mortgage.
Breaking a mortgage is fairly common. RateSpy.com says discussions with lenders suggest that only a little over half of borrowers with a five year fixed mortgage reach the end of their term,
and that 15-20 per cent of them pay a penalty for breaking the mortgage.
Life Happens: circumstances change
Kola Ifabumuyi , a mortgage planner, said a lot of people say they’re not going to make any changes during their mortgage term but many will.
People break mortgages and pay penalties because they are divorcing, swamped by debt and need to refinance, would like to pay their mortgage off early or they’re selling
And moving somewhere else.
With a variable-rate mortgage you know the penalty is three months interest. With a fixed rate you pay the greater of three months interest or interest rate differential(IRD).
The IRD is to compensate the lender for interest lost because you exited your mortgage early. Banks are particularly tough in how they calculate the IRD, alternative lenders less so.
There is no doubt that variable mortgages expose you to rate risk. Your costs are lower today, but could rise. You can always lock into a fixed rate later on, but timing that is not easy.
When choosing a mortgage think about your lifestyle. If there is a serious chance you’ll break your mortgage, the penalty in a variable -rate is simply calculated and often cheaper than
a fixed rate mortgage. There is value in having that flexibility, but only if your finances can withstand higher interest rates.
Adapted from Rob Carrick Globe and Mail