VARIABLE RATE MORTGAGE
January 4, 2015 | Posted by: Dennis Street
Do you decide on Variable Rate Mortgage or a Fixed Rate Mortgage? This is a very good question and history has shown the impact it can have on paying down the principal portion of your Mortgage. The acceptance of Variable Rate Mortgages has grown a lot in the past 6 years and for good reason when the consumer has experienced the reduced amount of interest paid. Realistically, the Prime Lending rate has continued to remain flat at around 3 percent. If it was higher than the acceptance probably would have remained low. Still though the discount off prime is what matters most. If prime is 3% and the Bank offers it at -.40% then you pay 2.6%.
If you’re going to be very uncomfortable with the likelihood that the rate could rise by a quarter of half percent then this isn’t the mortgage for you! In the past ten years the Variable Rate has always out performed a Fixed Rate Mortgage, meaning less interest paid with more of your payment going to the Principal balance. Also there is the possibility of a rate drop and an option to transfer to a Fixed rate Mortgage if desired. In the case of a payout, refinance or transfer the maximum penalty is limited to 3 months interest and no interest rate differential calculations to be concerned about which could be substantial. The home owner with lots of equity is usually more interested because they see less risk in the Variable rate mortgage and an opportunity to further reduce their Mortgage Balance over the term. That doesn’t mean the First Time buyers are not taking Variable Rate Mortgages. With a 5% down payment you can still qualify but to do so it’s based on using the Banks bench mark rate and that will be 2% plus higher.
Hybrid Mortgages have been created in different forms over the past 5 or more years but the one that makes the most sense combines the aspects of a Fixed Rate mortgage and an Adjustable Rate mortgage to a maximum of 80% loan to value of your home. This more suits the renewal and refinance market unless you’re lucky enough to have a 20% down payment.
You can get a Variable Rate Mortgage that has a Cap built into it protecting against any substantial increases by guaranteeing a maximum increase of approximately 1% and it freezes. In all cases if you use the funds from the Line of Credit portion for an investment then in becomes tax deductible.
All in all I consider the risk much more manageable when the Mortgage in split in two, Fixed and Variable because the Fixed portion acts as a bit of a buffer against higher cost if the Variable Rate increases. Should the Variable Rate decrease then it offsets some of the cost on the Fixed Rate portion.
If you are interested please contact me so I can review your situation and further discuss the pros and cons !