As promised in our blog last month, I thought we would do an overview of fixed versus variable rates, as this is a constant water cooler topic. As predicated, lenders have made significant changes to variable rate products. Most of the leading lenders are still offering prime rates at 3.00%, and five-year fixed mortgage rates are hovering in the 3.40% – 3.69% range.
What does this mean to you today? Taking a mortgage balance of $100,000.00 and a 25 year amortization, your payment:
- Based on variable rate 3.00%, would be $473.01
- Based on the current five year fixed rate of 3.69%, would be $509.35
The cost savings for this example would be $2180.40 over a five year term.
Now, looking back to one year ago when lenders were offering .90% below prime the cost savings were far more tempting, using the same data as above, the cost savings over a five year term would be $5043.60.
Remember, this is based on a mortgage for $100,000.00, so if you owe $300,000.00 then you would triple the savings for a total savings over five years of $15,130.80. So you should be able to see from these examples why the masses have opted to pay the lenders’ penalty and move into variable rate mortgages.
How do you choose which one is better - fixed or variable? The answer can be as simple as looking in the mirror.
- Would a potential increase in your current mortgage payment cause you hardship?
- Would the unknown or constant media attention for pending increases in Bank of Canada rate cause you stress?
- Do you have a low risk tolerance?
If you answered yes to any of these questions then a variable rate mortgage is possibly not the best choice for you.
Although historically variable rates mortgages have provided a lower rate versus fixed it doesn’t mean that variable is for everyone. There is a certain amount of risk associated with variable rate mortgages and the effects that an increase can have a direct impact on your monthly expenses. That means that when choosing a variable rate product, it’s important to ensure that you have a cushion to protect you against payment increases. Fixed rate products give you the guarantee of a set payment for the term of your mortgage.
Variable rates do offer historically lower rates, and that can often translate into long term savings in the amount of thousands of dollars. If you can comfortably weather any possible rate changes or increases then variable rate products are the way to go. If not, then staying with a fixed rate and a set payment could save you a lot of needless stress and worry over your mortgage.
An independent Mortgage Professional, like a CENTUM Mortgage Professional, can provide you with the information you will need to make an informed decision on how to best approach the question of Fixed verses Variable.
According to CanEquity, the average five year fixed rate mortgage taken over the past 10 years is 6.35%, whilst the variable option taken over the same time period shows and average of 4.24%
What does this mean to you in dollars? Based on the 10-year average mortgage rates mentioned above, a $100,000.00 mortgage and a 25 year amortization, if you chose a variable rate mortgage and you stuck it out for the full 10 years then you would have saved $12,165.00 versus staying in the fixed rate mortgage.