“Wow”! You say to your wife as you hit the bakes on the car. “Did you see the mortage rates those guys are advertising”? Your worries are over you’re thinking. Just lock in a rate like that for the next 10 years and you’ve got it made!

 

Not so fast. That rate may not be the one for you. Typically, the lowest available rate – and the one that makes the rate sign look great from the street – will be for a variable or adjustable rate mortgage. That rate has the potential to be like a roller coaster. The posted variable or adjustable rate is the rate that you’re getting today. Unless you have an economic ouija board, you will not be able to predict what kind of ups and downs are ahead of you.

 

Let’s take a closer look. A lender will offer different rates for different types of mortgages. The rates are determined based on financial risk to the institution and to you. When a customer is willing to take on the risk, they are rewarded with a lower rate. If the lender is taking on the risk ( by that I mean that the customer is promised a particular rate for a set period of time regardless what happens in the market) then the rate is higher. The loner the term then the higher the risk for the financial institution. 

 

So how do you decide? Fixed rate mortgages, because they require a low risk tolerance are usually better suited to first time home owners or those who do not keep an eye on the financial markets. 

Ask your self these questions:  

Do you like or need to know exactly what your payment is going to be over a long period of time?

Do you want to avoid the need to constantly watch rates?

Do you prefer the piece of mind of set it and forget it?

If you answered “yes” to all or most of these questions, then a more fiscally conservative fixed rate may be best option for you.

 

A variable or adjustable rate mortgage is best suited for people who have a flexible budget and can tolerate higher risk. Ask yourself these questions:

Do you watch market conditions?

Could you handle any sudden rate increases that would increase your payments?

Would you take a lower rate if it meant the possibility of your payment changing several times over the life of your term?

If you answered “yes” to all or most of these questions then a variable or adjustable rate may be the best option for you.

 

Some lenders offer a special promotional or teaser rate for the first few months of a variable rate’s term. Ask your mortgage professional how this could be good for you in the long term. Also discuss what your rate will be based on, will it be prime, prime minus   .3, .5 or .8%. Also you should know that most lenders will offer you an option to lock in your variable rate to a fixed rate at any time for the remaining portion of your term or for a longer term. 

If the uncertainty  of going with a floating rate will cause you to have sleepless nights, then that is not the option for you. In fact many Canadians choose the security of a fixed rate mortgage. They know exactly how much they will pay over the term of their mortgage, and they can plain accordingly with not financial surprises. However if rates do drop, then you committed to the promise that you have already made. You should know this that during the past 10 years 5 year fixed rates have averaged 5.5% while variable rates have averaged 5%. As a mortgage professional I can help you make the best choice, call me so I can find out what works for you.

 

Cheers,

 

Pat