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Variable rates means the interest charged on the mortgage may change on a month to month basis. We now have historical low rates.
Chances are mortgage rates will go up sometime in the future, true? It will drive you nuts listening to all the interest rate forecasts. You can lose yourself if charts and graphs of interest rate history. The fact is your guess is as good as the next guy's guess as to when rates will go up and how high they may go up! We have a special offer for you to test the results of your theory. Ask Phil about that; or, read on!
While rates are low, can you gain and still minimize pain? To steal Obama's line, "Yes, you can!"
Let's compare rate options for a $300,000 mortgage amortised over 35 years. Because the Minister of Finance made a recent announcement that any mortgage borrower needing mortgage default insurance has to qualify on the five year fixed mortgage rate, we will look at the variable versus five year fixed rate(s).
As of February 25, 2010, "best broker rates" for variable rates were under 2%, but let's use 2% for comparision. "Best broker rates" for five year fixed are below 4%, but let's use 4% for comparision. Newspaper, Bank Posted five year fixed rates are 5.39%
What if the rates do not change for a year, what is the difference between options?
Rate Monthly Payment One year interest cost Mortgage Balance end of one year
5.39% Posted $1,577.87 $15,918.38 $296,983.94
4% Discount $1,322.41 $11,828.27 $295,959.35
2% Payment= Posted $1,577.87 $ 5,856.20 $286,921.76
2% Payment= Discount $1,322.41 $ 5,881.91 $289,748.99
2% Payment=Amortisation $ 992.52 $ 5,920.68 $294,010.44
- If you compare payments with a variable at normal amortisation ($992.52/month) to the five year discount ($1,322.41) simple arithmetic of payment difference is $329.89 per month or $3,958.68 for the year.
- If you compare the true interest cost of the normal amorisation of the variable ($5,881.20) and the discount ($11,828.27), the difference is $5,907.58 not $3,958.68.
- If you compare the one year interest variable rate interest cost using the higher payments, you do not save much in the difference for a variable rate with higher payments. (happens when rates are so low!)
- If you compare the mortgage balance at the end of a year using the Posted payment with the variable your balance is $286,921.76. The Posted five year fixed rate will have at the end of a year a balance of $296,983.94. That's a difference of $10,062..18.
So, what is the risk? We don't know when rates will increase or by how much. But, every day that rates are not going up is a huge difference in interest costs to you.
Ask Phil will show you the savings potential and the risk of increased costs and increased payments based on what ever future rates you fear. Ask Phil to provide you with your own "how high" and "how fast" variable rate calculation.
Ask Phil how you can minimize the risk of a variable rate if you intend to use the variable rate for a short while, but want to protect yourself by getting into a fixed rate mortgage before rates get out of hand for your risk tolerance.