Variable Rate Mortgages (VRM’s) are gaining in popularity in Canada, and with good reason.
Five year fixed rates have been hovering around 3.5% for the past several months and Canadians are starting to see the benefits of a nice low rate locked at prime – 0.5%. Canada’s Prime Rate is at 3% right now, and probably will be for another year or two, so maybe it’s time for you to consider a VRM?
Variable Rate Mortgages aren’t for the faint of heart. Mortgage rates move up and down on a weekly if not daily basis and if you think this may cause you to lose some sleep it might not be worth the stress. If however you feel you can handle the uncertainty, a Variable Rate Mortgage will probably save you some money over the next few years. We believe that there are some keys to saving money and protecting yourself in a VRM.
1.DON’T TAKE A VARIABLE RATE MORTGAGE FROM A BANK! It’s a trap
Deal with a Non-Balance Sheet Lender. When you get a VRM from a major bank you are not partnered with an ally. Your Bank is interested in maximizing the amount of money that they can make off of you. Once you close a Variable Rate Mortgage with a Bank you no longer have access to the fixed rates that same Bank offers new clients to come over. Once you lock into a VRM with your Bank you are committed to paying that interest rate for the term of the loan, or you will be faced with a penalty to break that mortgage. If you want to lock into a Fixed Rate Mortgage with the same bank don’t expect to be getting the low fixed rates they are offering new clients, you will be subjected to their “existing client rates”(you can imagine what this means). By dealing with MorCan Direct you get access to lenders who agree to lock you into the same fixed rates that new entrants to the market are being offered, no inflated interest rates, no tricks, finally the knowledge that your Mortgage Lender is on your side.
2.Use a Mortgage broker who will keep you updated on changes in Mortgage Rates:
We can certainly recommend one for you. But even if you don’t go with us, pick a Mortgage Broker that you know will provide unbiased advice and timely information as to what is happening in the economy. Locking into a Fixed Rate ahead of a major shift in mortgage rates can be really important.
3.Set a comfortable Amortization Schedule:
Set your amortization schedule properly. Remember rates might go up, and you need to be prepared for that. So if you have the room now, set a longer amortization schedule today with your VRM so you can afford higher payments in the future. If your payment gets reset when you lock into a higher fixed rate towards the end of your term you should be prepared. You can always increase your payments on the Variable Rate mortgage you have today to pay down more of your interest.
4.Remember, rates will be higher in the future:
By taking a Variable Rate Mortgage today, and locking into a Fixed Rate Mortgage ahead of a major rise in interest rates during the term of your Variable Rate Mortgage you will almost certainly end up in a Fixed Rate Mortgage that is higher than the rate you would lock in at today. But what will you be locking the 5 year Fixed Rate Mortgage you would take today in at 5 years from now. By bidding your time in a Variable Rate Mortgage over the next 2 or 3 years, you can delay the move into a 5 year fixed rate by a few years at which point the exercise becomes a comparison of todays 5 year fixed rate with the 7 year fixed rate, or 10 year fixed rate in 2 or 3 years.
Investors get rewarded for taking risk.
You are taking a risk by choosing a variable rate mortgage.
In the meantime the only thing that will remain constant will be the uncertainty in the market. No one will know what product will serve you better with absolute certainty. When the US goes back to work the market will probably rally, this will increase bond yields and therefore mortgage rates. If the Canadian Real Estate numbers disappoint bond yields will drop and therefore so will mortgage rates. Although a lot of money has been injected into the financial markets to stabilise it inflation has not yet reared its head, and until it does we won’t see anything from our Central Bankers.
No one knows what will happen with interest rates in the future. There are many factors that can impact our mortgage rates. All we can do is identify the leading indicators to help you decide if and when fixed mortgages rates will increase to a point where you need to switch from a variable rate mortgage to a fixed rate mortgage. With variable rate mortgages at 2.5% (prime -0.5%) and fixed rate mortgages at 3.5% we think it’s worth it to take a variable rate mortgage.
We have been doing this for 14 years now and have built our business on providing sound, unbiased mortgage advice. Hopefully we can help you or someone you know make their next mortgage decision.