The interest rate picture is once again looking good.The Bank of Canada did not increase prime, and in fact they may not until next year. Main reason being, our heady loony will soar if the spread between Canadian and U.S.A. prime grows further, hurting exports further when economic growth for the second half of this year is already expected to slow.
So why are all the banks pushing us to ‘lock in’ to a fixed rate when rates appear to have stabilized and the pressure is off. Even longer term fixed rates have come down slightly and are very attractive. However the premium between fixed and variable is significant. The best variable rate is 2.25% compared to 5 year fixed at 4.24, 7 year 4.79 and 10 year 4.99%. Not too many people are opting for the 10 year fixed rate which is essentially ‘double’ the variable rate. The savings choosing a variable over fixed is staggering.
A $250,000 mortgage at 4.99 requires a monthly payment of $1,332.73 versus the variable of $954.28 a savings of $378.45 per month. The ‘peace of mind’ fixed rate, fixed payment mortgage principal balance at the end of 5 years is $229,372.47. By being able to apply interest savings as prepayments over the term reduces the principal balance to(are you ready for this?)only $148,026.90 an incredible savings of $127,399. Add this to the monthly interest and the total savings increases to $150,106.
A certain bank’s marketing theme has been for some time, ‘You’re Richer Than You Think’ and always makes us scratch our heads. In actual fact, and in all likelihood ‘You’re Poorer Than You Think’ if you take the bank’s advice. You see, your bank ‘advisor’ is first and foremost, a salesperson acting to maximize bank profits and shareholder return(at your expense). No wonder they are always encouraging people to ‘lock in’. We on the other hand want to save you money and make sure your interests are protected first.
How many people would rather pay the bank the bank an extra $150 K(if they realized this)by locking in to a fixed rate mortgage, as opposed to gaining such a ‘potentially’ huge savings with the variable, which also gives you the added ability to pay down your mortgage much much faster.
In addition, because ‘life’ often throws us unexpected curves,(for example, the need to move during the term), the penalty is often considerably less(3 months interest)with the variable, versus a possible Interest Rate Differential being applied with fixed rate mortgages which is usually thousands(sometimes tens of thousands) of dollars.
Who’s advice sounds better to you? Even if prime goes up over the term, and the actual savings decreases to some extent, is the ‘risk’ not worth the savings? We certainly think(know) so, you be the judge. If you are still unsure, give us a call. We’ll be glad to discuss further.