Red Deer Fixed Versus Variable Rate Mortgages
Red Deer residents face the difficult decision of deciding between variable rate mortgages and fixed rate mortgages. Instead of comparing the Red Deer mortgage interest rates posted online today, ask yourself the following questions to determine which type of mortgage is right for you.
Can You Afford a Variable Rate Mortgage If Interest Rates Rise?
Variable rate mortgages are a bargain when interest rates are low. The real question is if you can afford the mortgage payment if and when interest rates rise.
Know that you can take steps to mitigate the risk. For example, you could set the minimum payment somewhat higher than the absolute minimum. Then, if interest rates rise, you’re simply paying less principal toward loan. A side benefit of this strategy is that you’re forcing yourself to pay more toward the principal balance when mortgage rates are low. This buffer ensures you can afford the mortgage for a while if interest rates are rising, and that can give you the time to convert into a fixed rate mortgage if you decide that is the best option. You can always jump to a fixed from a variable with no penalty. You cannot go from a fixed to a variable with no penalty. Variable rate mortgages hold 3 months interest penalty anytime you break your mortgage so it is really transparent. Fixed mortgages use interest rate differential and big banks use posted rates resulting in penalties 4 to 5 times that of a variable mortgage. Trusted Red Deer Mortgage Brokers at Whalen Mortgages will go through these options so you pick a Red Deer Mortgage Lender or Bank after you understand the different products.
Can You Cope with Fluctuating Red Deer Mortgage Interest Rates?
Variable rates typically only go up a quarter of a percent at any given time. However, the Bank of Canada revisits the overnight rate which determines the banks’ prime rate every six weeks. This means the interest rate on your mortgage could change during the 6 week intervals, and it could ratchet up or go down every 6 weeks when the Bank of Canada does there meetings. Conversely, interest rates could drop. If you are ok with the risk of a variable this is your best option the increase in payments of .25% is very minor? If you want to know that your house payment will remain the same no matter the state of the economy, opt for a fixed rate mortgage.
Are You Likely to Refinance the Loan?
One of the benefits of variable rate mortgages is the lower penalty you’ll pay if you refinance your mortgage in Red Deer which will only be 3 months interest at any time. There is no penalty if you convert from a five year variable rate mortgage to a fixed rate mortgage. You would pay a penalty if you switched from a fixed rate mortgage to a variable rate mortgage.
Suppose you have a variable rate mortgage and want to change lenders. The penalty for those holding a variable rate mortgage is only three months interest oppose to a fixed rate mortgage the interest rate differential spread is used and at big banks this penalty is 4 to 5 times more expensive due to posted rates. That is typically one fourth the penalty of those with a fixed rate mortgage; they’d pay a full year’s worth of interest.
What should I look for when choosing a Red Deer Variable Rate Mortgage?
Conversion to fixed rate
One question to ask the lender is if they let you convert from a variable rate mortgage to a fixed rate mortgage. Some lenders put restrictions on when you can do this.
Another question to ask is what rate you’re guaranteed when you convert. You want to receive their best discounted rate, but banks will convert you at the posted rates or not as good of a discount rate. This is one reason why you want to work with Red Deer Whalen Mortgage – Big Banks will not tell you these things.
Big banks will typically use their posted rate when you convert, and this probably won’t be the lowest interest rate available. Feel free to call us and discuss your options. If you find that your bank is offering you a low rate, you’ll have peace of mind because you shopped around. However, it is likely we’ll be able to offer you the lowest rates on your Red Deer mortgage. And we’ll make sure we find a mortgage that works for you. For example, you may need to escape the penalties that come up when lenders use the higher posted rates.
Suppose the bank has a 5 year posted fixed rate of 5%. Then they offer you a discounted rate of 3.34%. The three year posted rate in this case is typically 3.34% as well. This equals a 1.66% spread on a half million dollar mortgage.
If you were paying off the mortgage three years early on a five year fixed mortgage, the interest penalty would be $500,000 x the 0.0166 spread x 3 years remaining. That is $8,300 per year times three years for a $24,900 penalty.
The penalty you’d pay for a variable rate mortgage with the same interest rate and loan balance would be $1016 multiplied by three months for a total penalty of $3,048.
Whalen Mortgages your trusted Red Deer Mortgage Brokers works with lenders other than the big banks to offer you solutions. They have lower penalties for fixed rate loans if you chose to refinance or sell your home early. They’ll offer lower rates upfront when converting from a variable to fixed rate mortgage, and they have better terms when you renew the mortgage. They tend to have lower overhead costs and fees in general, too. They do not have to pay for staff in a Bank to sell you their products. They let all brokers understand their products and we are experienced and can tell if it is a good option for our clients.
Apply online today to learn how much you could save on your mortgage.