Fixed or Variable? How About a 4 Year Fixed?!

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Currently there are big changes going on in the Canadian mortgage world.  We have discounts on the variable rates disappearing and the 5 year fixed is at an all-time low.  When we look at what is available right now, 2.75% on the variable and 3.39% available on the 5 year fixed, the decision on what to choose in my mind is obvious, the 5 year fixed.  Some people may still be stuck on the variable right now but is it really worth it?

Approximately 83% of the time through Canadian mortgage history the variable rate has proven itself to be the best deal over the fixed.  What I believe may happen in the next couple years is the 17% of the time that fixed is the best deal, is going to happen.

Now let's say you are still stuck on the variable.  There is another choice, it is the 4 year fixed rate.  Currently hanging around 3.09% makes it a really good deal.  You are protecting yourself from variable increases as well you are taking advantage of the low fixed position.  With the lower payment you can also decrease your amortization in order to pay down the mortgage faster, still with a reasonable monthly mortgage payment.

When you take into consideration that the average life of a 5 year term is around 3.6 years it is not necessary to take the long road with the higher rate.  With the Bank of Canada claiming they are not raising Prime until 2013, and remember the World economy is still uncertain, it may be longer.  Taking the 4 year term allows time to see what is going to happen as the Canadian mortgage world changes.  And if you do decide to break a 4 year term, the worst case usually will be a 3 month interest penalty.  If you have to take a small penalty to save thousands it is certainly worth it.

Well why not just take the variable then?  Remember, you usually do not get the banks best discounted rate when you switch from variable to fixed, a common calculation for this switch is Prime plus 1.00% or higher.  Right now that would put you at 4.00%, when the current five year rate is 0.70% below that it is not a good deal.  It is common to refinance when considering switching from variable to fixed, the small penalty saves you a lot of money.

To conclude, while in the middle of change it is best to take the road that will do the least damage if you make the wrong decision and having said that, the 4 year fixed is the best decision because you really can't lose.  It allows you time to wait and observe to see what the next trend will be.

Any questions or you want to talk to me about mortgages, feel free to contact me whichever way works best for you.

Ron Miller
905-667-0699

1-855-684-8326
ron.miller@butlermortgages.com
YouTube Hamilton Broker
@HamiltonBroker

Renewing your Mortgage Early, Cap It!!!

You can view all my videos on You Tube at HamiltonBroker.

Renewing a mortgage early usually happens when you want to take advantage of lower interest rates or you want to switch to a variable rate from a fixed.  Also a lot of financial savvy people will also purposely switch in the middle of their term simply to extent the low rates that they have.  If you have a variable rate and want to switch to a fixed and your current bank is not offering you a competitive rate, this is definitely a time to do a switch.  A family that plans on having a baby will also use this plan to secure low payments for a longer term, especially if they are going to lose an income if someone decides to stay home and look after the baby.  If you plan on getting pregnant and have a mortgage, plan wisely.

There are costs involved with switching early.  You will most definitely have at least a three month interest penalty.  Banks are even approaching their clients 6 to 8 months before their renewal is up and asking them to renew early and not even offering to waive the penalty.  The penalty may also be more than three months if you have a high interest rate than what is being offered at the time you are looking to switch.  In which case it will be an IRD penalty, interest rate differential.  This is the amount of money that the bank loses if you break your mortgage early.  If you have 18 months left on your mortgage and you have a 5% interest rate and the current rate is 4% you will be charged 1% on the remaining 18 months which will work out to around $3,000.  Depending on the size of the penalty and your long term savings or piece of mind will determine if you should renew early.  There is also a discharge fee or around $250 to release your current lenders charge from title.  If you do decide you wish to renew early call your bank and ask if they will waive all penalties and fees.  If they won't?  Because they can.  That is when you call me.  Why stay with them if they aren't looking after you?

These fees bring to the purpose of this post.  Some lenders will allow you to cap your mortgage to avoid having to pay these fees out of pocket.  Simply add the penalty on top of your current mortgage without having to refinance when you switch, "cap your mortgage".  The few lenders that allow this, do it for one simple reason, to get more business.  Because lenders allow the cap, it saves the additional costs of having to get a lawyer and it saves you from having to pay up front for your penalty and discharge fees.   There is limitations to how much you can cap, so contact me to see how it will work for you.

If you have any questions please do not hesitate to contact me or leave a comment.

Ron Miller
905-667-0699

1-855-684-8326
ron.miller@butlermortgages.com    

Mortgage Renewal

You can view all my videos on You Tube at HamiltonBroker.

I have already made a post on the mortgage renewal letter but have decided to add to it, because I feel some important points were missed, also I added the video.  Some people don’t take this very seriously and it is a real shame because the amount of money they are losing out on.  When you think about it, what is a $50 or a $100 difference in a monthly mortgage payment if you just accept what the lender offers you?  Well it’s $600-$1200 a year or $6,000 over five years.  What does paying that extra money do for you?  Absolutely nothing except drain your pocket, your retirement, kids’ education or whatever.  Money down the toilet!

 

What is interest?  It is the cost of borrowing, that simple.  The cheaper it is to borrow money, the more money for other things.  It amazes me to see someone clip coupons to save 50 cents on a pound of butter, but yet when the renewal letter arrives from their lender they just sign it and send it back.  How many coupons do you have to clip to save $6,000? Even if it is just a small difference of $500, it is still worth it to consult with a broker.

What does it cost to switch lenders at renewal time?

About $250, especially if your mortgage was default insured by CMHC, Genworth or Canada Guaranty (formally AIG).  The $250 is a discharge fee that your current lender charges to remove the mortgage from the title of your home.  If it is not insured there may be an appraisal fee around $350.  Some of or all of these expenses may be covered by a new lender or your broker, depending on the amount of your mortgage.  If you are going to have to cover all these expenses and your savings are not going to be high enough, you may just want to stay where you are.  That does not mean you cannot negotiate with your lender.  It is ok to call a mortgage broker and explain that you want to know what the going discount rate is right now.  Then call your lender back and ask for that rate.

How do you get the best mortgage rate at renewal?

The best thing to do is actually contact a mortgage broker 4 to 5 months prior to your mortgage renewal date and ask them to keep an eye on rates for you.  Even fill in an application and authorize the broker to do a credit check when they are actually going to submit your mortgage application.  We will hold on to the application and wait for the right moment to submit it.  Occasionally lenders have sales on rates just as department stores have sales, which can turn into huge savings for you.  Basically you are hiring a broker to nail down the best possible deal for you over the course of four months.  Watch out for brokers who do not use multiple lenders, make sure you call a high volume broker that uses at least 8 to 10 major lenders.

A new ploy that some lenders are using to trap people into the any rate that they want is by waiting 2 to 3 weeks before your renewal date to send you your mortgage renewal lender.  This is in hopes that you are not paying attention and will not have enough time to find a better rate.  All we really need is one week, so don’t be concerned if you contact us a little late.  Be pro-active, it can save you a lot of money.

As always you are free to contact me anyway that works best for you.  On weekends and evenings there is better chance of contacting me by email.

Ron Miller
905-667-0699

1-855-684-8326
ron.miller@butlermortgages.com