Is This the End of the Mighty Variable?

by Jay Calafiore

The bad news is that all international economies will struggle throughout 2012. The current lingering Euro-Crisis, combined with low domestic consumer confidence, will likely result in no significant interest rate increases until 2013.

The good news is that low interest rates will make things more affordable for all of us, and will also allow the GTA real estate market to maintain reasonable sales momentum. Ultimately, we would all prefer a better economy even if it meant interest rates needed to be marginally increased.A more difficult choice for 2012 is what mortgage to choose. Most Canadian mortgage rates are at an all-time historic low; generally speaking, the cost to borrow is now 3%. It’s no secret that the 5-year variable mortgage has performed best since it was widely introduced in Canada about 15 years ago.

This mortgage relies on interest rates rising and falling within a reasonable range, resulting in less interest paid over a longer period of time. Variable mortgages are also convertible, which allows the borrower to switch their mortgage early without penalties. Also keep in mind that the Bank of Canada usually only adjusts a variable rate mortgage by .25% a few times a year to address any inflation concerns.

These obvious benefits have resulted in huge demand for variable mortgages in recent years. With easy access to more information, an increasing number of consumers have realized it is both safer and cheaper to choose a variable mortgage over a fixed term… a real “no-brainer”. Then the mortgage world changed almost overnight!

Even though there is no hard data or statistics to support choosing a 5-year fixed mortgage over a variable product, lenders, for the most part, prefer that most borrowers do opt for the fixed product. Variable mortgages can be less profitable and therefore, are usually discouraged by lenders.

But borrowers have become more independent thinkers and their growing demand for variable mortgages has resulted in lenders changing variable rate mortgage pricing practically overnight so they may be more profitable quickly.

The days of borrowers enjoying variable mortgages at “prime less something” are over – and probably for a very long time. The new world is one in which 5-year variable mortgages will be priced at Bank prime (currently 3%). So if you are lucky enough to have a variable mortgage at “prime minus something”… hang on to it!

For mortgage newcomers, there is the burning question: “Should I choose a 5-year variable at 3% or a 4-year fixed at 3%?” Currently there is no significant difference between fixed and variable interest rates… so why take any chances on a variable mortgage in a potentially increasing interest rate environment?

Why not go with a fixed mortgage – at least temporarily – at the same rate as a variable, and then return to a variable mortgage at renewal, when the interest rate spreads likely return? And then there’s the 10-year fixed mortgage – currently at an all-time low of 4.75% – which may prove to be a bargain in the long run.

All these choices are good ones, and all these mortgage rates are cheap! Having said that, now more than ever, it is imperative that we make an informed and comfortable choice for each individual borrower. Let’s talk about you, your expectations, and marry you with the mortgage that makes you most happy! .

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