Ever since the variable rate mortgage was introduced, the question became do I choose the fixed or variable rate mortgage. With the recent rate increases, borrowers will usually choose the security of a fixed rate mortgage. This does, however, come with a premium as variable rate mortgages are generally 0.75% less than their fixed counterpart. On a $350,000.00 mortgage, this translates to a payment difference of about $135.00 per month. You as the borrower can take the lower payment and use it for purposes such as:
- Debt reduction – Paying down higher interest rate debt such as credit card, lines of credit or accelerating loan repayments on personal loans.
- Savings– Invest in RRSP’s or RESP’s for your children’s future education or just keep it in liquid savings for future use.
The preferred method of using the payment savings would be to increase the payment on the variable rate mortgage to that of the fixed rate mortgage. The increased payment portion will assist in the faster reduction of the principal on your mortgage. This will help to reduce the impact of prime rate increases over the term of the mortgage. If the prime rate does increase according to what the economists are predicting, we can anticipate increases in the prime of approximately 0.25% six months for at least the next 18 months. This would now bring the variable rate mortgage to the same rate as what your fixed rate mortgage would have been. With having to use the increased payment you would still be ahead, as initially, you had the rate savings plus the increased reduction in your principal. If the prime continued to increase by the same 0.25% every six months, it would take over 3 years for the variable rate mortgage not to outperform the fixed rate mortgage. If the prime rate increases don’t occur as predicted, then the pendulum swings greater in the favour of the variable rate mortgage. The variable rate mortgage also offers the same prepayment options as other mortgages plus you have the benefit of lower payout penalties should the need to sell arise.
The variable rate mortgage does have the inherent risk of the prime rate increases, so if you the borrower feel the need for security opt for the fixed rate mortgage. Jencor Mortgage Corporation will be able to assist in getting you the borrower, the best rate for your individual circumstance.