Fixed Rate vs. Variable Rate
The decision to choose a fixed or variable rate is not always an easy one. It should depend on your tolerance for risk as well as your ability to withstand increases in mortgage payments.
YOU CAN SOMETIMES EXPECT A FINANCIAL REWARD FOR GOING WITH THE VARIABLE RATE, ALTHOUGH THE PRECISE MAGNITUDE WILL EBB AND FLOW DEPENDING ON THE ECONOMIC ENVIRONMENT.
Fixed rate mortgages often appeal to clients who want stability in their payments, manage a tight monthly budget, or are generally more conservative. For example, young couples with large mortgages relative to their income might be better off opting for the peace of mind that a fixed-rate brings.
On the Fixed Rate side – It appears:
- COVID is not over, and in fact with new variants, it could take some time before we come out this pandemic.
- The Bond market is erratic, and large swings are making fixed rates unpredictable. The bond yield moved 30 bps last week resulting with some lenders increasing their fixed rates accordingly.
- US Fed decision regarding bonds, also resulting in more bond yield increases.
- Chinese / USA friction not helping.
- Current 5 year insured rates are approx. 2.19%.
- Many analysts are predicting higher fixed rates this year.
A variable rate mortgage often allows the borrower to take advantage of lower rates – the interest rate is calculated on an ongoing basis at a lenders’ prime rate minus or plus a set percentage. For example, the current prime mortgage rate is 2.45 percent, the holder of a prime minus 1.30% mortgage would pay a 1.15% variable interest rate.
On the Variable Rate side – It appears:
- Despite issues shown above, Variable rates ” are not “ being affected adversely.
- In truth, discounts are large, and savings to your clients could be exceptional.
- Variable rates “are not” expected to increase until mid to late 2022.
- Discounts on Insured 5year terms are approximately Prime 1.15% Current 3year Insured variable rates are .99%.
As a consumer, the best option is to have a candid discussion with your mortgage professional to ensure you have a full understanding of the risks and rewards of each type of mortgage.