In The Market For A Mortgage?
Choosing The Right Option Can Save You Thousands.
This is one of the most confusing
times in recent history for those looking to acquire, renew
or refinance a mortgage. In addition to making sense of seesawing
interest rates, there are an incredible number of options
to choose from.
As a starting point, you
have to decide if you want the stability of a fixed rate
mortgage, or if you're comfortable with the potential risks
and rewards of a variable rate mortgage.
Over the past few years,
interest rates have fallen to historically low levels and
as a result, many are choosing the peace-of-mind of a fixed
rate mortgage over the potential savings of a variable rate
mortgage. However, confidence in the economy is putting pressure
on longer-term interest rates, such as those for multi-year
fixed rate mortgages. As a result, many are turning to variable
rate mortgages as a more attractive short-term option.
“A variable rate mortgage
is now around a full point (one per cent) cheaper than a
fixed rate mortgage,” says Feisal Panjwani, senior mortgage
consultant for Invis. “Because of the widening spread between
short and long-term rates, even if interest rates rise, homeowners
with a variable rate mortgage have an advantage.”
A variable rate mortgage
allows the borrower to take advantage of low rates -- the
interest rate is calculated on an ongoing basis at prime
minus a set percentage. (Prime is the base rate that banks
use in pricing loans to their best and most creditworthy
customers.) For example, if the prime-lending rate of a bank
is 4.50 per cent, the holder of a prime minus 0.50 per cent
mortgage would pay a 4.00 per cent interest rate, until the
prime rate changes.
Why choose a variable
rate mortgage now? Consider the following:
A homeowner has $125,000
remaining on their $250,000 property loan and a 25-year amortization
period. Their monthly payment is $716. Let's assume prime
increases over the next five years to 5.75 percent -- this
equates to a 0.25 percent increase per year (on average).
The homeowner takes a common
variable rate mortgage at prime minus 0.60 percent. By taking
the variable mortgage instead of the comparable five-year
fixed, the homeowner saves $3,129.
The homeowner's outstanding
balance at the end of five years: $110,371 with a fixed-rate
mortgage at 4.85 percent versus $107,243 with a variable-rate
mortgage. Prime would have to increase to over 6.75 percent
in the next five years before variable rate mortgages become
an unattractive option for homeowners.
“Many simply prefer the greater
sense of stability that a seven to 10-year fixed rate mortgage
can provide in a changing rate market,” says Jim Rawson,
regional sales manager, Invis. “Nevertheless, the advantages
of a variable rate borrowing strategy are real: over the
last 50 years, research shows consumers would have been better
off by borrowing at prime rather than at a five-year fixed
rate 88 per cent of the time.”
As Canada's largest independent
mortgage brokerage firm, INVIS (www.invis.ca) works with
homeowners to complete a financial analysis of their situation
and determine which mortgage option is right for them.
This Article is Courtesy
of ARA Content
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