The Case for Variable-rate Mortgages

The Globe & Mail ran a story Tuesday about variable-rate mortgages.  It suggested homeowners are shunning them due to the high premiums most banks are charging above prime rate.

That is indeed true--for most variables.

However, it is worth noting that a few variable-rate mortgages are still at prime rate. 

Homeowners are not only not shunning these lenders, they are stampeding to them.  One such lender has an 8-day backlog of deals at the moment because of all the applications it is receiving.

The Globe's story also discusses Scotia's 4.35% one-year mortgage as an alternative to variables.  With open variables around at 4.00%, however, 1-year mortgages simply aren't that attractive in our view.  Besides a 0.35% rate advantage, the best current variable-rate mortgages offer:

• No penalties if you leave the lender before the 5-year term is up (This is handy if, 6 months down the road for example, you see better rates somewhere else. With a 1-year mortgage you're locked in for that entire year.)
• Interest savings if prime rate declines in the next 1-2 quarters--as most economists expect
• Interest cancellation (i.e. your chequing/savings balances can reduce your mortgage interest due)
• The ability to lock into discounted variable rates if/when they reappear
• The ability to readvance credit--if needed--as the mortgage is paid down
• The ability to make interest-only payments if you get in a short-term cash crunch

In short, the best variable-rate mortgages are still very much in play. 

Contact any mortgage planner for further details.