If you are currently looking to buy a new home or if your mortgage is coming up for renewal, I am sure you are wondering if taking a variable rate mortgage will be too risky given that we are in an increasing rate environment. Sales Person Tibor Olah with Apex Results Realty says” When there is a change in rates buyers feel they have to get in on these low rates, what they should be doing is talking to their mortgage person and asking what option is the better choice, low rates and restrictive terms are not always the best route.” Are you debating between whether you should lock in to the 5 or 10 year fixed since these fixed rates are still very low or taking the risk on a variable which is at an even lower interest rate? Which one is going to save you the most money in the long run?
Where none of us has a crystal ball and can not predict what the Government of Canada may or may not do with the Prime interest rate, we can make a somewhat calculated decision.
Here is how the numbers work out:
Lets assume a $350,000 with a 25 year amortization with the 5 year fixed rate at 2.99% and the variable rate at Prime -65 or 2.35%. Prime is currently 3%.
If Prime does not move in that 5 year period your interest savings from going variable is $10,343.57 and a savings in principal of $3,701.05.
If Prime went up .25 (a quarter point) each year in that same 5 year period your interest savings for going variable is $2,038.63 and a savings in principal of $588.81.
If Prime went up .25 (a quarter point) every six months in that 5 year period you would save $8,432.98 and savings in principal of $3,057.08 if you had gone with the fixed rate.
If Prime went up .15 every six months in that 5 year period you would break even either way you chose to go.
Anne Carr of the LA Mortgage Team”you have to ask yourself what are the odds that Prime will move .25 every six months for the next 5 years.” Where the past doesn’t necessarily predict the future, it can be useful to help access the current risk.
Back in September 2008 the Bank’s Prime Lending rate was 4.75% but went on a decline every month thereafter until April 2009. In April 2009 the Bank’s Prime Lending rate had dropped to 2.25%; the lowest in our history. It held at this rate until May 2010 when it finally moved up .25 to 2.5% in June 2010. It moved .25 again in July 2010 to 2.75% and then moved to 3% in Sept 2010. That moved .25 3 times in 8 months, however, it is important to note that it hasn’t moved since. It has held at 3% since Sept 2010 which is now 3 years and counting with no movement.
Below is a chart that shows the high, low and average of the Prime Lending Rate since September 2008
2008-09-01 — 2013-09-01
If Prime was to move .25 every six months for 5 years, it would mean that prime would increase .50% each year and end up at a rate of 5.5%. When was the last time you say that rate? You would have to go back about 10 years ago to see a Prime rate like that. So we have to ask ourselves this:
Is it likely that given this economic uncertainty and the bleak economic growth predictions for our country and that of the US that the scenario described above is a probable outcome? Do we really think Prime will go back up to 1990 levels in the next 5 years?