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The Case for Variable-rate Mortgages

variable-mortgage-rates 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.