Variable Mortgage

April 13, 2008

Fixed or Variable Mortgage?

The reason why some home owners favor variable mortgage is because of the lower interest rates available on variable or floating rate mortgage. As of April 12, 2008 a qualified home owner can get a floating mortgage at Prime less 0.50% to 0.75%. The discounted variable rate mortgage is between 4.50% to 4. 75%. This compared to the 5-year fixed rate mortgage at around 5.50% to 5.70% is about 1% lower.

Saving on interest payment

For a $300,000 mortgage amortized over 25 years, the monthly interest payment for a fixed rate mortgage works out to around $1,866 as compared to around $1,650 to $1,701. The saving on a variable term mortgage is quite obvious and translates into $165 to $216 a month or over $2,000 a year in interest payment saving.

The big Canadian Banks love their customers and home owners choosing variable term mortgage. They are more than willing to compete with the smaller “mortgage bankers” like FirstLine Mortgage, FirstNational, MCAP and others head-on and match their rates. Some banks even offer “open variable mortgage” at similar deep discounts below prime.

Beware of 2 mortgage traps!

What was seldom mentioned by the big Canadian Banks is the discount a home owner will get if and when they switch over to a fixed rate mortgage. There are 2 problems faced by all home owners who signed on a variable closed term mortgage with their banks.

Problem No. 1When a home owner’s variable mortgage is a closed term mortgage, he or she can only get out of the contract by paying 3 months interest penalty or the interest rate differential whichever is more. When a home owner converts his or her variable term mortgage to a fixed term mortgage, the discount available is set at posted less 1% or at the discretion of the bank.

If a home owner is getting a 1% discount below the posted rate, he or she is effectively paying around 0.5% to 0.6% more when converting to a fixed rate mortgage. Assuming when interest rates spike up after 1 year, and a home owner lock-in on a fixed term with 1% discount, he or she is paying $125 more in interest a month for a total of $6,000 extra in interest cost.

Problem No. 2 – Home owners are required under the bank’s variable mortgage plan to switch to a fixed rate mortgage not less than 5 years from the time when their mortgages were booked with their banks. Most smaller mortgage bankers have a lock-in period of 3 years. As shorter term fixed rate mortgages are normally priced lower than longer 5-year mortgage, a home owner ends up with a higher mortgage rate when locking in on a fixed rate mortgage.

You have a choice

Some home owners may not be aware on how to avoid some of the problems as mentioned above.  There are homeowners who are knowledgeable and actively paying down their mortgages will save thousands of dollars in interest payment.  If you do want to know more, please follow this link:  pay of their mortgages in one-third the time .

If you like to have more information on getting a mortgage, or any related issues on home financing,  kindly contact me (Elsie Tse) at 604-716-3369 or Email Me 

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