1-Year Mortgages Vs. Variables

July 10, 2009

1-Year Mortgages Vs. Variables

If you want a variable-rate mortgage (and are suited to one), take a peek at a one-year instead.

Here are nine good reasons why:

Although they’ve been improving, today’s variable-rate mortgages still have abnormally high interest rate premiums (averaging prime + 0.40% today, versus prime – 0.75% a year ago).
A 1-year mortgage doesn’t lock you into a rate for 3-5 years. That means you can refinance in 12 months when (hopefully) discounts to prime might be back.
The rates are comparable. Variable and 1-year mortgages are both based on short-term interest rates, so they move together over time. If you assume a 0.75% discount off of posted rates, 1-year fixed mortgages have actually been cheaper than prime over the last 10 years. The chart below shows the posted 1-year rate (the upper line). Discounted 1-year rates are obviously lower.
In certain cases, rates on 1-year mortgages are better than today’s best variable rates.
The most flexible 1-year mortgages are convertible into a fixed OR variable rate at any time, and at no cost.
1-years give you a chance to haggle with your lender again in 12 months. (Some people feel they get a better deal this way.)
If rates go up in the next 12 months, you’re protected for the remainder of the term in a fixed-rate mortgage.
If rates steadily climb over the course of five years, 1-year terms could help you come out further ahead. That’s because 1-year rates reset slower than variable rates—which is helpful when rates are rising.
1-year payments are fixed for a longer period of time than variable payments. That helps you budget a little easier. (The exceptions are the minority of variable-rate products with fixed payments.)

Besides a good 1-year fixed, consider a 2-year term as well. The rates are not that far behind. For a meagre ~0.20% extra, you’ll get one additional year of rate protection.

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Legalese: One-year terms are not suitable for everyone. The above reflects opinions and not a recommendation. Consult a licensed mortgage planner for details.

Posted in Mortgage Tips & Advice

Comments

If you want a variable-rate mortgage (and are suited to one), take a peek at a one-year instead.

Here are nine good reasons why:

Although they’ve been improving, today’s variable-rate mortgages still have abnormally high interest rate premiums (averaging prime + 0.40% today, versus prime – 0.75% a year ago).
A 1-year mortgage doesn’t lock you into a rate for 3-5 years. That means you can refinance in 12 months when (hopefully) discounts to prime might be back.
The rates are comparable. Variable and 1-year mortgages are both based on short-term interest rates, so they move together over time. If you assume a 0.75% discount off of posted rates, 1-year fixed mortgages have actually been cheaper than prime over the last 10 years. The chart below shows the posted 1-year rate (the upper line). Discounted 1-year rates are obviously lower.
In certain cases, rates on 1-year mortgages are better than today’s best variable rates.
The most flexible 1-year mortgages are convertible into a fixed OR variable rate at any time, and at no cost.
1-years give you a chance to haggle with your lender again in 12 months. (Some people feel they get a better deal this way.)
If rates go up in the next 12 months, you’re protected for the remainder of the term in a fixed-rate mortgage.
If rates steadily climb over the course of five years, 1-year terms could help you come out further ahead. That’s because 1-year rates reset slower than variable rates—which is helpful when rates are rising.
1-year payments are fixed for a longer period of time than variable payments. That helps you budget a little easier. (The exceptions are the minority of variable-rate products with fixed payments.)

Besides a good 1-year fixed, consider a 2-year term as well. The rates are not that far behind. For a meagre ~0.20% extra, you’ll get one additional year of rate protection.

______________________________________________________

Legalese: One-year terms are not suitable for everyone. The above reflects opinions and not a recommendation. Consult a licensed mortgage planner for details.

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