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Variable or Fixed rate Mortgage

 

Courtesy of  4Front Mortgages!

Rates Are Rising
After the Liberal majority win, the government of Canada bond yields started climbing, most likely due to the fact the Liberals have larger spending plans.

Variable Rates
Variable rates have gone up.  What this means is the discount that lenders give off of the Prime Rate has decreased.  A few months ago you could negotiate discounts around .60% – .80% below Prime.  Now discounts are around .30% – 40%. This takes the average variable rate you can get to the 2.35% level.  Previously at 2.00% a variable was an easy sell.  Now, with 5 year fixed rates at around 2.70% the choice isn’t as obvious.

Prime – 2.70%
The Prime Rate, currently at 2.70% may go up earlier than we all thought. With spending promises to keep, combined with a strong US economy it looks as though the long-awaited rate hike could take place in mid-2016. The first rate hike will likely be .25%, which would bring a variable rate to 2.60% (assuming you can still obtain .40% off of Prime), narrowing the gap between fixed rates to a lowly 0.10%, making fixed very appealing now. If you do choose a fixed rate, it is possible that you will qualify for more.  Lenders are required to ensure you can afford your mortgage if rates go up and if you’re in a 5 year fixed term that is all the assurance a lender needs.

Additional Considerations for Fixed Rates

Penalties – Penalties from some lenders (mainly banks) can make getting out of a fixed term very punitive.  Therefore, if you’re considering a 5 year fixed term but not too sure if you’ll be in the home for the full term consider going with a lender who offers a fair penalty calculation.

3 Years – The average time a first time homebuyer keeps in their property is 36 months. Going with a 5 year term may not be the best option if you’re unsure of how long you’ll need that mortgage for. Yes, you can always move mortgages from one property to another, however it can add some complexity to your application

Historical Considerations – Variable rates have been proven to be cheaper in “the long run”. Yes, math doesn’t generally lie, but what’s good in the long run may not necessarily be good for the next 5 years.

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