There has been a lot of mortgage news recently as the Big Banks fight for market share with record-low mortgage rates. In February, we covered how BMO Bank of Montreal started the mortgage wars by offering a 2.99% 5-year fixed rate mortgage. Other lenders followed suit, matching the 2.99% rate, but generally offering only a 4-year option. On March 29th, RBC Royal Bank signalled the end of this war by raising its rates by 50 basis points to 3.49%. It is expected that other lenders will follow RBC's lead in order to shore up their profit margins.
As a consumer, given the current fixed and variable rates available, what should you do?
Since 1975 variable rate mortgages have proven to be more financially beneficial 82% of the time. That said, some experts are now saying that, given historically low rates, we may now be in that 18% period where it makes more financial sense to lock into a fixed rate mortgage. Remember, even with the higher 3.49% mortgage, the current rate is far below the historical average, which, since the 1950s, has generally remained north of 6%.
Some things you should consider when choosing between a fixed- and variable-rate mortgage:
Choose a variable-rate mortgage if:
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- You think interest rates will remain at the same level or lower during the term of the mortgage
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- You think there's a possibility that you may sell prior to the end of the term and wish to avoid excessive pre-payment penalties (there is, typically, a 3 month interest penalty on VRMs)
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- You can afford a possible rise in rates
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- You think interest rates will rise more than the difference between your current fixed and variable rate mortgage options
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- You have no plans on selling your home during the mortgage term
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- You want to know what your payments will be and have peace of mind that they will not change
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- Something else to consider is that some lenders will allow you to first enter a variable-rate mortgage and then switch or 'lock-in' to a fixed rate mortgage if rates begin to rise
In the end, your personal situation is unique and you should speak to a professional mortgage specialist or broker to determine what the best option is for you; I would be happy to recommend one if you don't already have someone in mind.
Patricia
(604)376-7653