“Should I
take a variable- or fixed-rate mortgage?” is the question I get asked most by
clients. While we work with our
customers to help them come to a decision on what’s best for their financial
circumstance, here are a few questions to consider when deciding on a mortgage
type.
Can you qualify for the mortgage you want?
The
criteria to qualify for a variable-rate mortgage (VRM) is different than a
fixed-rate mortgage. Remember the housing crisis in the U.S.A. almost five
years ago? It had a significant impact on the qualifying criteria for people
who now want VRM’s. VRM’s are more difficult to qualify for under the debt
ratio guidelines because the government has built a buffer for borrowers should
rates go up. For VRM’s, borrowers qualify based on the Bank of Canada’s
qualifying rate of 5.34%. The impact is that it lowers ones ability to qualify
for a certain mortgage amount by about $40,000 less in mortgage money compared
to a five-year fixed rate. Many first-time home buyers would like the lower
rate of a VRM, but can’t qualify for the mortgage on the home or condo they
want to purchase because of the qualifying restrictions of a VRM.
What’s your budget?
Your
current money-management practices have an impact on your choice of a VRM or a
fixed mortgage. If the only reason you’re choosing a VRM and a lower payment is
because it will allow you to spend more in other areas, the VRM is not the best
choice for you financially. If you’re a saver and have money set aside if rates
go up (and can make the difference in mortgage payments) you’re a good
candidate for a VRM.
What’s the forecast?
Historically,
borrowers who have a VRM tend to pay less in interest over the life of their
mortgage, than a fixed rate. The interest rate on a five-year fixed mortgage is
currently in the mid-three percent, while a five-year VRM is below three
percent. The Bank of Canada’s overnight lending rate has an impact on a Bank’s
prime rate, which is the indicator that VRM’s are based on. The current
forecast is that rates may rise in mid-2015. Until then, those who choose VRM’s
now should be aggressive in paying down the principal on their mortgage and
take advantage of the lower rate.
I'd love to
hear how you make your own decisions on the type of mortgage you choose. Please
e-mail me at lastovic.s@mortgagecentre.com or visit my blog at
www.lastovic.s@mortgagecentre.com and offer your comments. If you're on twitter
follow me @Sandra_lastovic.
