Almost entirely for the past 30 years variable rates have outperformed the fixed rate mortgage. So why are fixed terms so prevalent? Most often reason, Peace of Mind knowing that your mortgage payment will remain the same throughout your term.
What does Peace of Mind cost?
Today for example if a lender has a 5 year fixed rate at 4.39% and a Variable Interest Rate Mortgage (VIRM) is PRIME +.40 which equals to a variable rate of 2.65%. The difference is 1.74%.
Calculating a mortgage amount of $100,000 over 25 year amortization with both options having a 5 year term. The fixed rate monthly payment is $547 whereas the VIRM mortgage payment is $455. The difference is $92 per month or $1100 per year.
If fluctuating mortgage rates cause you distress a good option to choose is the VIRM with the lower payment but set your payments higher say to the fixed mortgage payment of $547. Setting your payment higher should offset future rate increases and with each rate increase you can also increase your payment to keep on track for a shorter mortgage amortization and continued savings in the cost of borrowing.
Using the example above. Choose to pay $547 the additional $92 per month goes directly towards the principle which will save you $6,154 in the interest over the 5 year term.
To further reduce your outstanding balance with little effort switch to paying every 2 weeks or 26 times per year; known as bi-weekly accelerated or bi-weekly rapid payments. This will reduce your outstanding balance at the end of 5 years an additional $3,108. This tactic will save in the cost of borrowing as well as reduces your amortization from 25 years to less than 18 years with this accelerated option.
Important to note that any client that chooses a variable interst rate mortgage has the option to convert to the very best fixed rates available at the time of switching. Not all lenders offer this to their clients and this is a very important point to consider when choosing a variable rate lender.
There are clear benefits with Variable Interest Rate mortgages, but it is not for everyone.
Feel free to call or email if you would like to see which mortgage is right for you!
Anne 604 996 8388 anne.vanidour@td.com
Filed under: Mortgage Planning | Tagged: Amortization, Finance, Fixed Rate Mortgages, Mortgage Advice, Mortgage Planning, Real Estate, Refinace, TD Canada Trust, Variable Interest Rate
