VARIABLE VERSUS FIXED

The decision to choose a fixed or variable rate depends on your tolerance for risk as well as your ability to withstand increases in mortgage payments.  You can sometimes expect a financial reward for going with the variable rate, although the precise magnitude will ebb and flow depending on the economic environment.

Fixed rate mortgages often appeal to clients who want stability in their payments, manage a tight monthly budget, or are generally more conservative.  

A variable rate mortgage often allows the borrower to take advantage of lower rates -- the interest rate is calculated on an ongoing basis at a lenders’ prime rate minus a set percentage.  For example, if the prime mortgage rate is 5.70 percent, the holder of a prime minus 1% mortgage would pay a 4.70 percent variable interest rate.

As a consumer, the best option is to have a candid discussion with your mortgage professional to ensure you have a full understanding of the risks and rewards of each type of mortgage.

1. With a fixed rate mortgage, the interest rate is set so your mortgage payment will remain the same throughout the term of your mortgage.  Fixed rates typically range anywhere from a 6-month term to a 10 year fixed rate term.

2. With a variable rate mortgage, the interest rate is tied to what is known as the prime rate, and the prime rate fluctuates.  Currently, variable rate mortgages are typically offered as Prime less a discount, such as Prime - 1.00%.  If the prime rate changes, with some lenders your mortgage payment, will change accordingly, and with other lenders, the payment is set.  For example, if the prime rate increases with the set payment option, more of the payment will go towards interest and less towards the principal.  Even though the prime rate may fluctuate, the discount to prime will remain constant throughout the term.

If you decide to choose variable please note the following:

1. Not only is it important to look at the variable rate, in my opinion, but it is also EQUALLY OR MORE IMPORTANT to look at the lock-in policies.  Certain lenders will have better shorter term rates (ie 3 years) whereas other lenders may have the better middle (ie 5 years) to longer term (ie 7 years, 10 years) rates.

2.  I email economic updates/prime rate changes to my clients on the variable rate so you are kept current and can make an informed decision if you decide to convert to a fixed rate and of course you can always call me to discuss.  My clients really like the updates and please refer to "Testimonials" for reference in the "About Us" section of this website.

3. I have a program that compares fixed rates to a variable taking into consideration potential prime rate increases.  It would be a good idea to meet in person to go over your options in detail and at the same time, we can go through some potential scenarios comparing fixed rates to a variable.  If you are interested in the variable rate then there is a good chance you will have a much better understanding of how it works after the meeting. 

 

PENALTY CALCULATIONS

How The Penalty Is Calculated
Although your intention is not to break your mortgage within the term regardless of the product you choose it is important to understand how penalties work because you never know what will happen within the term.  Even though lenders use the same type of penalty calculation the way each lender determines the rate to calculate the penalty can differ considerably, which can result in a much higher penalty and sometimes substantially.

 
I had some clients referred to me whose current mortgage was with a major bank.  They wanted to refinance their mortgage into a lower rate and at the same time access some equity for home renovations.  I could offer them a better product than what their bank was offering, however, the penalty was abnormally high based on their existing rate and mortgage amount which was less than $150,000.  I told the clients to contact the bank rep and ask them how the penalty was calculated and at first they were sent some generic penalty information.   After probing further they were told that they received a discount of 2.36% which worked against the clients.  

Please access the following                 which explains how penalties work and also mentions the discount calculation as per above.