With changes to mortgage rules and interest rates on the rise here are some tips for your variable rate mortgage that could save you thousands.
Since 2009 the prime lending rate has shifted from a high of 6% down to 2% range remaining fairly level for the past few years before rising to a present day level of 3.45%. During that time, lenders have offered consumers high discount variable mortgage as low as 1.2% when rates were at their lowest, to current rates of 2.45 (depending on the lender and if the mortgage is insured or not).
Historically the choice of a variable rate mortgage over a fixed term has allowed borrowers to save in interest costs.
I always recommend if my clients can qualify and it makes sense for their specific situation to choose variable only if they will take full advantage of the lower rate. By setting their payment to the equivalent of the 5 year fixed rate at the time, the difference in payment goes directly to principal pay down.
Every 10% increase in payment shaves three years off the amortization of a five-year term so every bit extra matters and can make a difference.
If your mortgage is maturing in the next 90-180 days, it is time to talk to your Dominion Lending Centres mortgage professional for tips for your variable rate mortgage that could save you thousands.
You may feel the pressure to lock in to a fixed rate after the recent increases in the prime lending rate. For some this may be an option. However, I have the same advice every time someone asks me this question: It depends on your situation and we need to do a review. Take the extra time to review the current rate, remaining term of the mortgage, the new offer, how that will impact payments and your plans for staying in your home, moving and/or if this is an investment property.
For example Amy and Jake have a current balance of $300,000 on their mortgage with a variable rate at Prime minus .80% (2.65%). Current payments set at $703 bi-weekly. The mortgage matures in 24 months but they are considering to lock in for a new five-year term offered at 3.34%. New payments would be $739. They love their condo but not sure if they will stay or move in two years or not.
After a review of their mortgage we offer a second option. Keep the remaining variable rate mortgage in place for the remaining two years. Set payments at 3.34% or $739 bi-weekly.
They decide on this second option because:
In 24 months the savings on interest is $4,000 and their outstanding balance is $4,000 less than by staying in the fixed rate
They won’t be locked into a mortgage for another five years
If they choose to sell before the maturity date, the penalty on a variable mortgage is only three months interest
In two years they can either choose to stay with the same lender or move to another lender without penalty
With this strategy they don’t have to feel pressured into locking in today and they can continue to take advantage of the lower variable rate.
So if you are in a variable rate mortgage and not sure what to do. Remember my tips for your variable rate mortgage that could save you thousands.
By Pauline Tonkin