Mortgage Blog

Variable Rate Mortgages Save You Money!

January 3, 2019 | Posted by: Brandi Pierik and Matthew Pierik - Red Deer and Calgary Mortgage Brokers

What Your Bank Does Not Want You To Know!

There – I’ve said it! I’m a true believer in variable-rate mortgages because I’ve seen them save the most money for Red Deer homeowners who heed the advice that this is their best long-term option.

You simply can’t catch up on the news of the day lately without speculation that interest rates are headed sky-high. But, it’s important to remember that anyone who’s actually knowledgeable on this subject isn’t worried about a spike in mortgage rates! Yes, they have been on an upward trend, but they’ve also been sitting near historic lows for several years.

And, since I’m all about saving more money for my clients, I know that a variable-rate mortgage is the smartest option available. You see, banks are all over fixed rates because their profit margins rise significantly every time a homeowner opts for a fixed-rate mortgage.

It’s also important to remember that bank economists – who receive a lot of media attention – represent large institutions that stand to gain financially when borrowers go fixed. And, in many cases, there are a lot of repercussions associated with locking in from a variable to a fixed-rate that economists know little about compared to the expertise offered by mortgage brokers who arrange mortgages every day.

What happens when you lock-in?

The first thing that happens when you lock in is an instant increase in your interest rate – on average, a half to three-quarter percentage point rise – rather than waiting for the Bank of Canada (BoC) to actually increase interest rates.

There’s also a prepayment penalty associated with locking in if you need to break your mortgage for any reason. Many borrowers assume the penalty for breaking a mortgage amounts to three months’ worth of interest payments, which is the case for a vast majority of variable-rate products. But, with a fixed-rate mortgage, the penalty is the greater of three months’ interest or the interest rate differential (IRD).

The IRD calculation is what’s responsible for those huge penalties you hear about borrowers paying to break their mortgages. Penalties vary from lender to lender, however, and there are different penalties for different types of mortgages, so it’s important to know what you’re getting into by locking in.

Rates expected to fall again

Signs are already pointing to a stock market slowdown, which means that the BoC will eventually lower rates again. And, if you’re at a variable rate, you can reap the rewards of these lower rates.

And, you can further benefit in a variable mortgage by keeping your payments the same when rates drop to pay down more of the principal balance. You see, every extra bit you can pay towards your principal translates into you becoming mortgage-free that much sooner!

Do you have questions about whether a variable mortgage is right for you? Answers are just a call or email away!

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