I have been getting lots of questions about how to proceed with a mortgage renewal - variable – fixed and so forth. I asked Ron Butler from Butler Mortgage for his expertise and here is what he offered. On behalf of readers of Happy Capitalism and listeners of Talk Radio AM640 I offer many thanks!
Make it a profitable day and happy capitalism!
Here is what Ron had to say:
Tricky Question but here are some points:
Variable Rate Mortgage used to have a discount from Prime of as much as 90 basis points off prime (so Prime is 2.70% less 0.90% = 1.80% mortgage rate) recently lenders have pulled back to as little as 0.10% off prime = 2.60% although we can still find borrowers a deal at 0.60% off Prime = 2.10%
Fixed rates have gone up as well, most banks are 2.99% five year fixed rate although Butler still has 2.49% 5 – yr fixed rates to offer.
It is important to know that you can switch from a Variable to Fixed with every lender whenever you want at no cost BUT when you lock in to the Fixed rate it will be the prevailing rate in the future when you lock, so it may be a much higher Fixed rate than today.
Bottom line is that if the difference between a Fixed and a Variable is very small take the fixed because the if the risk premium is only 30 or 40 basis points for 5 years no sane person would take the risk for so little rate upside. The only additional consideration is the possibility the BOC Governor will lower Prime and the Variable mortgage holder will have a lower rate, if you have a Fixed rate that rate can never go down.
There is another compelling problem in comparing fixed and variable rates. Variable rate mortgages typically have a very simple, low penalty to break the mortgage: 3 months interest payments. Today, in the case of all fixed rates, because of the complicated, self serving calculations banks are using to compute penalty calculations the penalty will NEVER be 3 months interest: the penalty will likely be 3.00% or 4.00 of the mortgage BALANCE, a huge penalty.
So although Fixed rates may look preferable to Variable rates today the high penalty feature of Fixed rates are something all mortgage consumers need to be aware of.
BUTLER Mortgage Inc. (BMI)
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