Good news for all of you out there with variable rate mortgages. Interest rates are dropping again.
On Tuesday, the Bank of Canada lowered the key lending rate a half a percentage point, from 4% to 3.5%. The Bank also issued a cautionary statement, indicating that, with the recent U.S. slowdown, the Bank is primed to bring rates lower if need be.
Soon after the Bank of Canada lowered rates, financial institutions in Canada responded. Prime rate went from 5.75% to 5.25%, bringing down variable rate mortgages with it. In fact, a mortgage broker can get you a variable rate mortgage with a rate of 4.65%.
Meanwhile, fixed rate mortgages didn't move much at all after Tuesday's announcement. A few lenders dropped 1,2 and 3 year rates, but 5, 7, and 10 year rates remained unchanged. At this point, variable rates look much more attractive than fixed rates.
So is it a good idea for the average consumer to take on a variable rate mortgage?
Variable rate mortgages fluctuate with prime rates. When rates move down, so does their interest rate. Inversely, when rates move up, so does their interest rate. This will mean higher interest cost, and that will translate into a higher mortgage payment.
Generally I recommend that clients lock into a five year term. Since homeowners generally buy the most home they can qualify for, they're often at the upper limit of what they can afford. If rates do move up, they're protected from any increase in their payment.
A fixed term also offers the security of knowing what the payment will be every month. And if your income goes up during the term, it just makes the mortgage more affordable. Extra cash can either be used to pay down the mortgage, or perhaps other debt.
If you're a little more risk tolerant, than a variable rate mortgage may be right for you. It may be an interesting option if you can handle the risk, and if you have lots of room to afford a higher mortgage payment. If you don't think you can handle the risk, then go with the fixed rate. If nothing else, you'll sleep better. Call me at 403-334-5555 or email firstname.lastname@example.org for more info.