How Opting For Variable Rate Mortgages Could Benefit You
Over the years, the general consensus has been that variable rate mortgages are more desirable than fixed rate mortgages. However, qualification terms and conditions put variable rates out of reach for many people who were left with no other option but to choose fixed-rate mortgages. Recently with the fixed rate mortgages increasing and rule changes, variable rates are being looked at closely again.
Prior to October 2016, if you were purchasing a home, you could obtain a mortgage rate of 2.6% for a ‘FiveYear Fixed’ mortgage and qualify at that contract rate. You could also go with the ‘Five Year Variable Rate’ mortgage for 2.3%. However, in order to get the variable rate, you had to qualify at the benchmark rate which was 4.64% at that time. Due to this higher qualification, many home buyers couldn’t take advantage of the lower rate that a variable mortgage offered.
January 1, 2018, saw the implementation of the Stress Test’ legislation added for conventional mortgages which is anyone putting 20% or more towards downpayment. The new legislation now mandates that ALL high ratio mortgages qualify against the current benchmark rate which is currently at 5.34%. Conventional fixed rate mortgages are now having to qualify at 2% higher then the contract rate and as a result, more people are looking closely at the variable rate mortgages.
Variable rate mortgages have always appealed to home buyers but were tougher to obtain. As this is no longer the case, more people have been opting for a variable mortgage as it allows you to get a lower mortgage payment. Where some current ‘Five Year Fixed’ rates are sitting as high as 3.39% for an insured mortgage, a variable rate is available with some lenders at *Prime (*3.45%) less 1% which equals to 2.45% for a five-year term.
While the rate is the deciding factor, the infamous downside of a variable rate mortgage is fluctuation. Because the rate is based on the ‘prime’ rate, your rate could go up unexpectedly. The Bank of Canada has raised its trend-setting interest rate three times (totalling .75%) this year and is expected to do so at least once more before the end of 2018. If your current rate was Prime less 1% and the Bank of Canada raised the rate from 3.7% to 3.95%, your contract rate would automatically increase from 2.7% to 2.95%, which means an increase in your mortgage payment.
Most people recognize the risks associated with a variable rate mortgage but by opting for a variable rate mortgage, you can use the advantage of the lower mortgage payment to pay off your mortgage faster. You will have less interest accrued on your mortgage and any extra money that you would have been paying on a fixed rate. You can also place any extra money as lump sum payments towards your principle. This is something that is within your control, and you can start and stop the lump sum payments whenever you choose.
Taking the example of a $300,000 mortgage with a variable rate of 2.45%, your payment would be $1336 per month. If you had a fixed rate of 3.39%, you would be paying $144 per month more on your payment. If you took the extra $144 in savings with the variable rate, and still placed that on your mortgage each month, at the end of the five-year term you would only have sixteen years and ten months left remaining on your amortization vs. the standard twenty years. Instead of just pocketing the extra cash, you can plow those savings back into the mortgage to pay it off faster.
As a professional mortgage broker in Edmonton, Alberta, I strive to help you find a mortgage that works best for you. Whether it is for a trade up home, first time purchasing, real estate investing, vacation property or debt consolidation, I will help you understand how much mortgage you can manage, and explore both traditional and innovative mortgage options.