Posted by: Carmelo Buttice
Here are the facts your bank won’t tell you about the difference between a fixed or variable rate mortgage.
These tips will help you get to zero on your mortgage faster — even if interest rates increase.
Choosing a mortgage often comes down to picking between fixed Vs. variable rate mortgages. Currently, the 5-year variable rate hovers around 2.30%; approximately 0.30% – 0.40% lower than the 5-year fixed rate.
Which mortgage is best for you? Most bankers will tell you, “Take the 5-Year fixed as it will protect you from any future interest rate increases.”
Protecting yourself from possible rate increases in the future is great; however, it comes at a cost. So is the fixed rate mortgage still better? The answer, as usual, can be found by calculating the numbers — not by taking your banker’s word at face value.
First, let’s look at the savings between the 5-Year Fixed Rate and 5-Year Variable Rate; then let’s look at the cost of breaking each mortgage.
At MonsterMortgage.ca we love to find opportunities to lower your borrowing costs, minimize penalties and help you get to zero on your mortgage as fast as possible — so you can keep more money in your pocket, not your bank’s.
For our example, let’s look at a mortgage with a balance of $350,000 and a 25-year amortization. The typical bank’s 5-year fixed rate is 2.89%, and the 5-year closed variable rate is ‘Prime minus 0.40%’ or 2.30%.
In the past seven years, the Bank of Canada’s Prime Rate has not increased, but to illustrate the power of the variable rate, let’s assume it was to start moving up. Assume the prime rate increases 0.25% at the end of each year of your mortgage. That is four increases (one at the end of each year) and an increase of 1% over the five years. On the 5th year, your mortgage will be up for renewal once again. Upon renewal, you will once again have the opportunity to choose variable or fixed.
The math is easy for the fixed rate mortgage. If you take the fixed rate mortgage at 2.89%, your mortgage balance will be $298,526.13 at the end of the five-year term. In total, you will pay your principal down by $51,473.87 and will have paid $46,726.33 of interest.
The math is more complicated for the variable rate as we are going to assume the Prime rate will be increasing 0.25% each year until the 5th year when the term ends. We have to look at the math one year at a time. Meanwhile, we want to compare apple to apples. The interest rate for the variable rate is lower which gives it an advantage – so when comparing the two, we will keep the monthly mortgage payment the same.
Taking the variable rate is a strategy to put more money in your pocket — NOT THE BANK’S. Even with the variable rate increases each year of 0.25% you still will save $2,079.39 in interest versus the fixed rate product. On top of that, the balance on your mortgage will be $2,079.39 lower on the variable rate mortgage compared to the fixed rate… But I bet your banker would have already told you that!
THE FACTS YOUR BANK WON’T TELL YOU
1. The Bank will not — Show you the numbers between Variable and Fixed Payments
2. The Bank will not — Provide you with a strategy to protect you from rising interest rates
3. The Bank will not — Give you advice that makes their business LESS money!
If you have questions about whether you should take a variable rate or a fixed rate, fill out the form at the top of the page and speak to a mortgage expert today!