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Fixed or Variable? A Panel of Mortgage Brokers Say Variable


Blog by Kevin Kurjata | March 20th, 2011


Most people like the pridictability of a fixed rate mortgage. According to this article 2/3 of Canadian mortgages are fixed. The 5 year fixed rate is also the one that is most often quoted in the news. It is also the rate at which people have to qualify to borrow, even if they intend on using a different product like a 3 year fixed or a variable rate. 

It would appear that the primary concerns for Canadian Consumers are:

  • Interest rate
  • Predictability

However, as this article shows, mortgage professionals disagree with paying for the "security" of a fixed rate in the name of predictability. 

http://www.theglobeandmail.com/globe-investor/personal-finance/rob-carrick/fixed-rate-mortgages-find-few-friends-among-brokers/article1944593/

David Larock of Integrated Mortgage Planners: “I have long thought that the five-year fixed-rate mortgage was overrated because you’re paying a premium for interest-rate protection, yet not really getting as much as you think. For example, if you take a five-year fixed today, and rates stay low for 2½ years and then start taking off, you have paid for five years’ worth of protection and, in the end, you’re only really getting a benefit for half of that time period.”
John Cocomile of Greedy Mortgage: “In theory, rates are at historical lows and they will trend up to where they've been historically, but not for a long time. The mess in the U.S. is going to keep rates low for the next 18 months to two years, likely longer. Most people in longer-term fixed-rate mortgages end up paying a big penalty, anyway.”
David Larock of Integrated Mortgage Planners: “I have long thought that the five-year fixed-rate mortgage was overrated because you’re paying a premium for interest-rate protection, yet not really getting as much as you think. For example, if you take a five-year fixed today, and rates stay low for 2½ years and then start taking off, you have paid for five years’ worth of protection and, in the end, you’re only really getting a benefit for half of that time period.”

John Cocomile of Greedy Mortgage: “In theory, rates are at historical lows and they will trend up to where they've been historically, but not for a long time. The mess in the U.S. is going to keep rates low for the next 18 months to two years, likely longer. Most people in longer-term fixed-rate mortgages end up paying a big penalty, anyway.”

 

First of all - why would someone name their company Greedy Mortgage?

Anyway, I agree with what both of these guys have to say, particularly in a transient community like Dawson Creek. While many of my clients focus on the "security" of a fixed rate mortgage, they overlook the potential for penalties if they try to get out of the mortgage early. These penalties are rich and it's worth planning for the unknown - like a job transfer or an addition to the family, to avoid them. Your mortgage provider will be able to help you with this, but you have to know the right questions to ask.

In my opinion - informed by lots of experience with people trying to sell their house before the end of their term, the primary mortgage concerns of Dawson Creek home buyers should be:
  • Flexibiliy (as in - "if I need to sell before the end of my term, how much will the penalty be?")
  • The best possible rate for a shorter time frame - like a 3 year term.

Most importantly - you need to be informed so that you can ask the right questions of your mortgage provider. Call me if you want that information. I can save you a lot of headache's and cash.