Posted by: Kristian Harris
It looks like our blog post “The banks are telling you to lock into a fixed rate, should you question it?”, posted on April 29, 2010, has been receiving some questions and comments regarding the topic of fixed vs. variable rates.
Here is one of the comments posted (This comment has not been edited):
“japajill” There is a risk premium attached to fixed rate mortages, but it makes sense to lock in when your budgeting. You know your monthly payments and you won’t be subject to rate hikes from speculating bond traders. If your conservative, like my parents, you will like to know what your next payment will be. No to find a big shock that that the rate has jumped up. Changes in interest rates are largely permanent, even day to do, and you don’t want to suffer from the volatility.”
I just wanted to share my response to this comment:
monstermortgage1: @japajill Thanks for your comment. I agree that knowing what your payments are is very important for budgeting purposes. In our example, we suggest that clients pay their variable rate at the fixed rate which is currently 3.00% higher than the variable rate. One of our main goals is to help people pay down their mortgage faster by having a lower mortgage balance at the end of their 5 year term while still maintaining their peace of mind.
In today’s environment, we believe the bank’s are fear mongering i.e. trying to sell people “peace of mind” or “greater security” by convincing them it is better to take a fixed rate mortgage when they know that in most cases, there is no real risk in choosing a variable rate mortgage.
In fact what we are trying to show is that consumers will actually be ahead of the game in today’s environment. As mentioned, if homeowners choose to go with a variable rate mortgage, pay it as if their are paying a fixed rate mortgage (i.e. staying disciplined and paying a fixed rate schedule) then they will be even further ahead of the game at the end of their five year term.
Following this type of strategy allows people to still have the peace of mind they seek, to keep more money in their pockets vs. the banks and mortgage free alot faster.
At the end of the day, it is important to understand all your options and to know all the facts of your mortgage so that your mortgage strategy works for you, not your bank.
Thanks again for your feedback
Feel free to post any questions or comments and I will be glad to respond!