Variable-rate mortgages are finally back to prime and it’s been a year in the making.
Not coincidentally, we’ve been coming across more people who are thinking about riding out a variable for the next five years. It’s a gutsy call given future rate hike expectations, but some people are willing to take the risk. For those people, it’s worth considering a 1-year mortgage as well.
The key with a 1-year is that you’re not locked into a variable rate for 4-5 years. Instead, you get a similar rate now, while retaining the option to switch into a variable rate next year at (potentially) below prime.
A 1-year fixed also protects you against rates rising in the next year, should the Bank of Canada hike its overnight target before September 2010.
The risk with a 1-year is that variable rate premiums and fixed rates rise before your renewal. In 8-12 months you could theoretically face prime + 1/4% or more. Few expect this, but anything’s possible.
Despite the risk, and given the apparent probabilities, a 1-year near prime frequently makes sense over a variable.
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More About 1-years: 1-year and variable-rate mortgages are both funded in the short-term money market. Therefore, they tend to move together over time. This graph below shows prime rate compared to 1-year fixed rates over the last 10 years. (The 1-year rates are discounted 1/2% from posted).
If you’re thinking of taking a variable with plans of locking in when rates rise (not recommended, for reasons we’ve discussed here before), then a 1-year convertible offers similar benefits and more.
Last modified: April 28, 2014
In follow-up to the above, today’s 1-year rates are much better than the graph suggests. The 1/2% discount we used in the chart was merely a rough approximation of a 10-year average.
Similarly, variable rates have varied from prime over the last 10 years. (Sometimes 1%+ higher and sometimes 1% lower)
I just bought a house (closing Oct 30th) and have room to withstand increases in rates. I’m thinking about a variable rate vs a 1-year fixed. Can you tell me what is the going rate for a 1 year fixed term? and how likely are rates going to go into the prime minus territory next year?
Thanks,
Mary from Toronto
Mary,
As a frequent reader of this blog – I can tell you – Rob doesn’t like making predictions, since he knows how often “experts” can be wrong.
A 1 year fixed can be had for 2.1-2.2%. “Experts” would tell you we will see discounted variables, but not to the extent we’ve seen in the past (70-90bps) in the near future.
Without knowing your situation – there is some value in the 5 yr fixed space right now – and if you can withstand increases in rates, perhaps you can take advantage of great prepayment privileges.
Contact Rob, or a mtg planner to get the full treatment.
Dan
The going rate depends on your needs and qualifications Mary. Check out the Globe for a general idea…
http://www.globeinvestor.com/servlet/Page/document/v5/data/rates?order=a&pageType=mortgage_closed_short&sort=IR1YR&page=0
Any broker can do better than these rates but this will give you a starting point.
FWIW, as far as prime minus is concerned, the chances IMO are better than 50%.
Kevin
Why, thank you Dan. :)
Mary, happy to chat any time. Alternatively, here’s a link where you can find a mortgage planner in your area if you prefer a face-to-face meeting.
Cheers,
Rob
touch choices, i have room in my budget for risk but don’t want to get blown out…
1) take vrm and convert in 2010 however fixed rates could be at a higher level
2) take a 1 yr fixed, ride the low rate and have the upper hand for negotiations since you can leave the bank, possibly prime minus however fixed could be hire even w/ discounts and vrm w/ minus, prime could continuously go up
3) take a 3 yr fixed, ride the low rate and have the upper hand for negotiations since you can leave the bank, possibly prime minus however fixed could be hire even w/ discounts and vrm w/ minus, prime could continuously go up
4) take a 5yr fixed and be content it’s at a historic low, however lose out on a 1 – 3yr low rate savings
I guess option 1-3 would be trying to have your cake and eat it too….. option 4 would be safe one of course….
Any thoughts?