Tuesday, 1 December 2015

Fixed or Variable, How Do I Know What's Right For Me?

Choosing which type of mortgage rate suits you best is a difficult decision that should require some deliberation. My first suggestion would be to sit down with me and we can go over the pros and cons of each, unique to your situation.

Barring that, here's some helpful advice which may help you narrow the choice down somewhat.

Robert Mclister is found of Intellimortgage Inc., and chief editor of Canadian Mortgage Trends. He has prepared an excellent set of questions to make the decision easier when making this tough choice.

  1. Can you manage a potential rate hike? According to a recent survey, 16 per cent of respondents said they would not be able to afford a 3-percentage point increase in interest rates, while roughly 27 per cent would need to review their budget. Another 26 per cent said they would be concerned, but could probably handle it. “We look at a client’s payment today, factor in amortization and make sure they can handle the potential increase, both during the term and at renewal,” he said. “If a client is set on a floating rate we also find ones with fixed payments, but a fixed payment doesn’t mean ‘risk-free’.”
  2. Do you have three months of savings put aside? Cash reserves enhance one’s ability to withstand higher rates. “The last thing you want is a soaring variable-rate at the same time as other budgetary stress, like a layoff, separation, illness, new baby or some other unforeseen expense.”
  3. Where will you be in five years? Clients who break a fixed-rate mortgage early, can face a steep interest-rate differential penalty. By contrast, terminating a regular variable-rate mortgage costs you just three months of interest. That’s a key consideration if you want refinance flexibility, may sell and rent or can’t port for some reason. In many cases, it’s more prudent to choose a three-year term.
  4. What’s the spread between a 5-year fixed and variable? The current spread is about half a percentage point, far below the long-term average. “That makes the relative cost of a fixed-rate certainty historically cheap,” McLister said. “But it also suggests that the market is expecting low rates to persist. Over the long run, variable rates have easily outperformed fixed rates, but one notable exception is when the spread is very small.” What’s the break-even point? There’s a point when a long-term fixed rate becomes cheaper than a variable rate. “Today, that would happen if prime rate shot up over three-quarters of percentage point,” McLister estimates. “If inflation becomes a threat, the Bank of Canada could easily take rates higher than that. That’s the risk.”  
For more, check out this article from Genworth Canada.

As you can see, there are plenty of arguments to be made for both options. What it really comes down to is your personal preference and your tolerance for risk. The defining question becomes this:

Are you able to sleep soundly at night, knowing the potential for rates to change if you choose a variable rate mortgage?

When you're ready to delve into these questions in more detail, visit me at my website, or fill out a secure online mortgage application HERE any time!

  • Can you manage a potential rate hike? According to a recent survey, 16 per cent of respondents said they would not be able to afford a 3-percentage point increase in interest rates, while roughly 27 per cent would need to review their budget. Another 26 per cent said they would be concerned, but could probably handle it. “We look at a client’s payment today, factor in amortization and make sure they can handle the potential increase, both during the term and at renewal,” he said. “If a client is set on a floating rate we also find ones with fixed payments, but a fixed payment doesn’t mean ‘risk-free’.”
  • Do you have three months of savings put aside? Cash reserves enhance one’s ability to withstand higher rates. “The last thing you want is a soaring variable-rate at the same time as other budgetary stress, like a layoff, separation, illness, new baby or some other unforeseen expense.”
  • Where will you be in five years? Clients who break a fixed-rate mortgage early, can face a steep interest-rate differential penalty. By contrast, terminating a regular variable-rate mortgage costs you just three months of interest. That’s a key consideration if you want refinance flexibility, may sell and rent or can’t port for some reason. In many cases, it’s more prudent to choose a three-year term.
  • What’s the spread between a 5-year fixed and variable? The current spread is about half a percentage point, far below the long-term average. “That makes the relative cost of a fixed-rate certainty historically cheap,” McLister said. “But it also suggests that the market is expecting low rates to persist. Over the long run, variable rates have easily outperformed fixed rates, but one notable exception is when the spread is very small.” What’s the break-even point? There’s a point when a long-term fixed rate becomes cheaper than a variable rate. “Today, that would happen if prime rate shot up over three-quarters of percentage point,” McLister estimates. “If inflation becomes a threat, the Bank of Canada could easily take rates higher than that. That’s the risk.”
  • - See more at: http://resourcecentre.genworth.ca/professional-perspective/fixed-vs-variable-the-age-old-question?utm_source=ho-newsletter&utm_medium=email&utm_campaign=issue5#sthash.S14nPAZs.d
  • Can you manage a potential rate hike? According to a recent survey, 16 per cent of respondents said they would not be able to afford a 3-percentage point increase in interest rates, while roughly 27 per cent would need to review their budget. Another 26 per cent said they would be concerned, but could probably handle it. “We look at a client’s payment today, factor in amortization and make sure they can handle the potential increase, both during the term and at renewal,” he said. “If a client is set on a floating rate we also find ones with fixed payments, but a fixed payment doesn’t mean ‘risk-free’.”
  • Do you have three months of savings put aside? Cash reserves enhance one’s ability to withstand higher rates. “The last thing you want is a soaring variable-rate at the same time as other budgetary stress, like a layoff, separation, illness, new baby or some other unforeseen expense.”
  • Where will you be in five years? Clients who break a fixed-rate mortgage early, can face a steep interest-rate differential penalty. By contrast, terminating a regular variable-rate mortgage costs you just three months of interest. That’s a key consideration if you want refinance flexibility, may sell and rent or can’t port for some reason. In many cases, it’s more prudent to choose a three-year term.
  • What’s the spread between a 5-year fixed and variable? The current spread is about half a percentage point, far below the long-term average. “That makes the relative cost of a fixed-rate certainty historically cheap,” McLister said. “But it also suggests that the market is expecting low rates to persist. Over the long run, variable rates have easily outperformed fixed rates, but one notable exception is when the spread is very small.” What’s the break-even point? There’s a point when a long-term fixed rate becomes cheaper than a variable rate. “Today, that would happen if prime rate shot up over three-quarters of percentage point,” McLister estimates. “If inflation becomes a threat, the Bank of Canada could easily take rates higher than that. That’s the risk.”
  • - See more at: http://resourcecentre.genworth.ca/professional-perspective/fixed-vs-variable-the-age-old-question?utm_source=ho-newsletter&utm_medium=email&utm_campaign=issue5#sthash.S14nPAZs.dpuf
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