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MORTGAGE ARTICLES
Fixed or variable-rate mortgage?
“Wow!” you say to your spouse as you hit the brakes
on the car. “Did you see the mortgage rate those guys are advertising?”
Your worries are over, you’re thinking. Just lock in a rate like that
for the next ten years, and you’ve got it made.
Not so fast. That rate may not be the one for you. Typically,
the lowest available rate – and the one that makes the rate sign look
great from the street – will be for a variable or adjustable-rate mortgage.
That rate has the potential to be like a roller coaster. The posted variable
or adjustable rate is the rate you’re getting today. Unless you have
an economic ouija board, you won’t be able to predict what kind of ups
and downs are ahead of you.
Let’s take a closer look. A lender will offer different
rates for different types of mortgages. The rates are determined based on
financial risk – to the institution and to you. When a customer is willing
to take on the risk, he/she is rewarded with a lower rate. If the lender is
taking on the risk (that is, the customer is promised a particular rate…
regardless of what happens in the future), the rate is higher. The longer
the term, the higher the risk for the financial institution.
So how do you decide? Fixed-rate mortgages, because they
require a low risk tolerance, are usually better suited to first-time buyers
or those who haven’t owned a home for a very long period. Ask yourself
these questions: Do you like or need to know exactly what your payment is
going to be over a longer period of time? Do you want to avoid the need to
consistently watch rates? Do you have less than 25% down? If you answered
“yes” to all, or most of these questions, a more conservative
fixed-rate mortgage could be the better choice for you.
A variable or adjustable-rate mortgage is best suited to
people who have a flexible budget and can tolerate higher risk. Ask yourself
these questions: Do you watch market conditions? Can you handle any sudden
rate increases that could increase your payment? Do you have 25% or more equity
in your home? If you answered “yes” to all, or most of these questions,
a variable or adjustable-rate mortgage might best suit your needs.
Some lenders offer a special promotional rate for the first
few months of a variable-rate mortgage, which you should discuss with your
mortgage broker. Also discuss what your rate will be based on – prime
minus 0.5% or 0.6% or on Bankers’ Acceptances (BAs) plus 1%. The latter
being a new kind of adjustable-rate mortgage that has recently been introduced
to the marketplace. Most variables or adjustables allow you to exercise an
option to “lock in” a fixed rate at any time for the remaining
portion of your mortgage term or for a longer term.
If the uncertainty of a floating rate is going to give you
sleepless nights, you’re in good company. Many Canadians
prefer the certainty of a fixed-rate mortgage. They know exactly
how much they will pay over the term of their mortgage, and they
can plan accordingly… with no financial surprises. But if
rates do drop… and drop… and drop… you are committed
to the “promise” that you have made. Your best option
- have a professional help you decide which option best meets
your needs.
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