Have a Variable Rate Mortgage? Should You Be Following Fixed Rates?
Have a Variable Rate Mortgage? Should You Be Following Fixed Rates?
People who choose a variable rate mortgage should be comfortable with some amount of fluctuation in their payment over time as banks will adjust their prime rate from time to time.Variable rate mortgages have been identified as offering costs savings over five-year fixed mortgages (based on historical data), when consistently chosen over the long-term. As such there are people who are comfortable with the uncertainty in their payment and believe that more of the time than not, that they will have a lower mortgage rate than if they had chosen the fixed rate alternative. There can be several other reasons why people select a variable rate mortgage, but this is typically the most common motivator.
With the prime rate still staying very low, essentially at the bottom, and variable rate mortgage pricing also coming down to essentially being at prime, there is a considerable difference in rate between a current variable rate mortgage and a fixed rate mortgage of similar term, it is pretty much a two percent (2%) difference at this time. With this marked difference there are several people who under “normal” circumstances would opt for a fixed rate mortgage, are finding the variable option hard to not consider. Depending on the mortgage amount and amortization period, it would not be unreasonable for the difference in payments between the variable and fixed rate options to be $200 or more a month.
So where I am going with this is there are some people taking variable rate mortgages today that may not be “true” variable rate people if you will. For these people I suggest one of two things:
- Keep your eye on fixed rates
- or, Get into the variable rate mindset
Keep your eye on fixed rates – By this I mean most variable rate mortgages offer the option to lock into a fixed rate at any time as long as the term you lock into reaches the end of the original term you committed to. So, if you fully intend to lock in your variable rate you should be keeping an eye on what the fixed rates are doing and not be concerned with what your variable rate may or may not be doing. Reason is, you are planning to move to a fixed rate and whatever those are at the time you lock in is what you will be getting, so the goal is to make this transition before rates go up by much or reach a certain point that you are predetermined.
Get into the variable rate mindset – By this I mean one has to expect the prime rate and therefore your payment, to be increasing from where it is now as we are currently at rock bottom in terms of the rate. One strategy to help prepare yourself for this is to set aside money every month into a separate savings account. The amount you set aside can be the difference between your current mortgage payment at what it will be when rates go up by say 1% as an example. By doing this you will get you used to paying what you will need to pay likely down the road, while also building up a nice little chunk of savings. These savings can then be used to lump sum (one type of pre-payment privilege) against your mortgage balance, thus saving you in interest costs and reducing the time required to pay off your mortgage.
In closing, here are a few things to consider before selecting a variable rate mortgage:
- Are you comfortable with your payment going up and down over the next three to five years? Specifically though, could you still be comfortable if within the next 12-18 months your monthly mortgage payment increased by about $200?
- If and when your variable rate is extremely low, as it is now, can you set aside a little extra every month into a separate account to keep yourself accustomed to a more regular payment amount? (as in my example above and then use your extra money to pay down your mortgage faster)
- If you plan on keeping the variable rate mortgage for only a short time, have you decided what your cut-off point for locking in is (i.e. at what fixed rate will you force yourself to lock-in)?
For more information on comparing and contrasting variable and fixed rate mortgages and assistance in determining which may be best suited to you. Please contact me at any time.
(604) 603-2520 | Maury@MauryLum.com | www.MauryLum.com |
