See video

Do you have a decision to make: either because you have an existing mortgage that is variable or you are planning on taking a new mortgage?

The Bank of Canada July 20, 2010 25 basis point ( that is equal to 0.25%) increase of over-night rate triggered a Prime Lending Rate increase of 0.25% on variable rate loan products, including mortgages.

The video explains a single scenario of a $400,000 mortgage starting off with a five year term and thirty five year amortization.   Your mortgage will most likely have a different balance.  The fixed rate of 4.19% is commonly offered today, but your situation may be different.   The variable rate show is based on Prime at 2.75% with a .55% discount- but your situation may be different.

The fixed rate advantage is certainty.  You know to the penny what your payments will be.  If you make those payments (not adding extra principle payments during the term), you will know your balance in five years to the penny.  Certainty.

The variable rate is subject to change as the lender Prime Lending Rate changes.   You can set your payment for more than the minimum, but there is always the chance the rates will go up to the point where you have to increase your payments in order to pay the mortgage in the perscribed amortizaton period.   Because rates can change, you will not know your cost of interest until the final day in the variable.  Uncertainlty.

BUT, there is a significant difference in interest rates.  In this example there is almost two percent- almost double the cost.

No one knows what rates will do in the future.  There are some excellent financial models to predict economic "what ifs", but there is uncertainty.  Rates may go up, may go down, may stay the same.  But, historically, variable rates take their name because they do vary.  If rates go up or go down- when and for how long?   Varies historically, too. Even analysis of economic waves shows differences in highs and lows and time between.

What is your best guess or fear about what variable rates will do?  Your guess or fear is as valid as the next.

To see what the results of your best guess are, to see if the risk of a variable is worth the reward of reduced interest costs, please do the following:

Have this information ready-

  • mortgage balance
  • fixed rate available
  • variable rate available
  • amortization
  • (or, if it is an existing mortgage, what is your rate and payment amount now)
  • your guess as to how much Prime will change and over what period of time

 

hit "Contact" to bring up info@askphil.ca  or just hit info@askphil.ca and provide the information.  I will send you a spread sheet in Excel that will provide an analysis of your unique numbers.   Once you have the spread sheet, you will be able to change the numbers of balance, rates, etc if you decide not to decide and hold off a decision until later.