Leanna Mamatis and her husband Rick knew exactly what they were after when they sold their home in North York and bought a new one in Markham.
They wanted more space, but not too much, and a swimming pool in the backyard.
Mamatis also knew what she was after on the mortgage. Even though interest rates are poised to increase, the couple decided to go with a variable rate mortgage for a three-year term.
“It’s lower than the fixed rate,” Mamatis said. “I’m not a financial expert, but it seems to me that interest rates are not going to go up too fast too soon. I just wanted to make the payments as minimal as possible in terms of the interest.”
With other pressing expenses, such as tuition and fees and lessons in music, karate, hockey and baseball for their four teenagers, making extra mortgage payments is not a priority right now, Mamatis added. “But if we can put a chunk of money down on the principal, then we will.”
Research shows that homeowners who take a variable rate mortgage can save much more over the life of a mortgage than those who stick with a fixed rate.
But that doesn’t mean variable rate mortgages, which go up and down with the prime rate, are right for everyone.
What looks best on paper may not be what fits your life.
If you opt for a fixed rate, you know that your payments will not change over the mortgage term. You’ll pay a higher interest rate in exchange for that peace of mind.
If instead you took at variable rate of 2.85 per cent and could maintain the same rate for 25 years, your payments on a mortgage of the same amount would be $931 a month and the total interest $79,350.
Of course, those are assumptions that may not hold true.
That’s why home-buyers must give a lot of thought to their tolerance of risk and the state of their personal finances when they decide on a rate and a term.
Ask yourself, if you choose a variable rate, and rates go up, will you be able to afford the higher monthly payments?
A 2001 study by York University finance professor Moshe Milevsky found that variable-rate mortgages saved borrowers money 89 per cent of the time over fixed rates. An update in 2008 also came down on the side of variable rates.
Milevsky said in an interview that his study should be used with caution.
“It’s a lot like buying stocks and bonds,” he said. “While overwhelming research shows that stock outperform bonds most of the time. But there will be prolonged periods of time when bonds do better. That’s why we always tell people with investments if you can’t take the chance of losing money and you don’t have the risk appetite, don’t put all your money in stocks.”
The Bank of Canada, which kept interest rates at historic low levels to support the economy through the recession, is expected to begin raising rates later this year.
Mortgage broker Jeff Mayer of Mortgage Intelligence has clients with variable mortgages asking if they should lock-in with rates set to rise in the coming months.
“I tell them you have to look at the trends and the past history. The rates will go up in time, but the Bank of Canada usually only changes rates by 25 basis points [one-quarter of a percentage point] at a time,” he said.
The difference between a variable and fixed rate right now is one percentage point, and in some cases, even higher.
Broker Paula Roberts urges clients to think about the term of the mortgage.
“Most people automatically go to the five-year term. Sometimes they don’t even realize they have other options,” said Roberts, a broker with Mortgage Intelligence.
“People need to think about their plans for the next three to five years. If you know you’re going to be moving or having kids, you can take a shorter term. If you want the certainty of the fixed rate, you can choose a longer one.”
She also suggests that borrowers with a variable rate set their monthly payments at a higher amount, closer to the fixed rate. The excess will go directly to the mortgage principal and if you rates go up and you lock-in, there won’t be any payment shock.
“Start with your own financial goals and work backward from there. Interest rates can change, but so can things in your life, particularly for younger people. You may be changing jobs and moving away or starting a family in the next couple of years,” said Colette Delaney, senior vice-president at CIBC Mortgages, Lending and Insurance.
For instance, you probably have other financial goals such as saving for retirement, or your children’s education.
“Just because you take out a mortgage doesn’t mean you forget about all your other goals or saving a little bit each month. If rates move up, are you still going to be able to put money away in that RESP or take a holiday?
“It’s not just about looking at the interest rates today and choosing the lowest one; it’s about looking at the years to come and having a mortgage that will allow you to adapt.”
They wanted more space, but not too much, and a swimming pool in the backyard.
Mamatis also knew what she was after on the mortgage. Even though interest rates are poised to increase, the couple decided to go with a variable rate mortgage for a three-year term.
“It’s lower than the fixed rate,” Mamatis said. “I’m not a financial expert, but it seems to me that interest rates are not going to go up too fast too soon. I just wanted to make the payments as minimal as possible in terms of the interest.”
With other pressing expenses, such as tuition and fees and lessons in music, karate, hockey and baseball for their four teenagers, making extra mortgage payments is not a priority right now, Mamatis added. “But if we can put a chunk of money down on the principal, then we will.”
Research shows that homeowners who take a variable rate mortgage can save much more over the life of a mortgage than those who stick with a fixed rate.
But that doesn’t mean variable rate mortgages, which go up and down with the prime rate, are right for everyone.
What looks best on paper may not be what fits your life.
If you opt for a fixed rate, you know that your payments will not change over the mortgage term. You’ll pay a higher interest rate in exchange for that peace of mind.
A quick glance at RateSupermarket.ca shows the great divide between fixed and variable.
For a $200,000 mortgage at a five-year fixed rate of 5.69 per cent, you’ll have a monthly payment of $1,243. If you kept that rate and term, over the 25-year life of the mortgage, you’d pay nearly $173,000 in interest.If instead you took at variable rate of 2.85 per cent and could maintain the same rate for 25 years, your payments on a mortgage of the same amount would be $931 a month and the total interest $79,350.
Of course, those are assumptions that may not hold true.
That’s why home-buyers must give a lot of thought to their tolerance of risk and the state of their personal finances when they decide on a rate and a term.
Ask yourself, if you choose a variable rate, and rates go up, will you be able to afford the higher monthly payments?
A 2001 study by York University finance professor Moshe Milevsky found that variable-rate mortgages saved borrowers money 89 per cent of the time over fixed rates. An update in 2008 also came down on the side of variable rates.
Milevsky said in an interview that his study should be used with caution.
“It’s a lot like buying stocks and bonds,” he said. “While overwhelming research shows that stock outperform bonds most of the time. But there will be prolonged periods of time when bonds do better. That’s why we always tell people with investments if you can’t take the chance of losing money and you don’t have the risk appetite, don’t put all your money in stocks.”
The Bank of Canada, which kept interest rates at historic low levels to support the economy through the recession, is expected to begin raising rates later this year.
Mortgage broker Jeff Mayer of Mortgage Intelligence has clients with variable mortgages asking if they should lock-in with rates set to rise in the coming months.
“I tell them you have to look at the trends and the past history. The rates will go up in time, but the Bank of Canada usually only changes rates by 25 basis points [one-quarter of a percentage point] at a time,” he said.
The difference between a variable and fixed rate right now is one percentage point, and in some cases, even higher.
Broker Paula Roberts urges clients to think about the term of the mortgage.
“Most people automatically go to the five-year term. Sometimes they don’t even realize they have other options,” said Roberts, a broker with Mortgage Intelligence.
“People need to think about their plans for the next three to five years. If you know you’re going to be moving or having kids, you can take a shorter term. If you want the certainty of the fixed rate, you can choose a longer one.”
She also suggests that borrowers with a variable rate set their monthly payments at a higher amount, closer to the fixed rate. The excess will go directly to the mortgage principal and if you rates go up and you lock-in, there won’t be any payment shock.
“Start with your own financial goals and work backward from there. Interest rates can change, but so can things in your life, particularly for younger people. You may be changing jobs and moving away or starting a family in the next couple of years,” said Colette Delaney, senior vice-president at CIBC Mortgages, Lending and Insurance.
For instance, you probably have other financial goals such as saving for retirement, or your children’s education.
“Just because you take out a mortgage doesn’t mean you forget about all your other goals or saving a little bit each month. If rates move up, are you still going to be able to put money away in that RESP or take a holiday?
“It’s not just about looking at the interest rates today and choosing the lowest one; it’s about looking at the years to come and having a mortgage that will allow you to adapt.”
By Madhavi Acharya-Tom Yew | Mon May 2 2011
Courtesy of http://www.moneyville.ca:80/article/984007--why-variable-rate-mortgages-are-the-way-to-go
For all your mortgage needs call: Eduarda (Eddie) Pita - 416-920-9931
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.