OTTAWA – The difference between the interest on a variable-rate mortgage over a fixed-rate loan has shrunk compared to where it was just a few years ago, making fixed-rate offerings more tempting.
Mortgage adviser Toma Sojonky says a recent move by lenders to prune their discounts to the prime rate for new variable rate loans has borrowers pausing and considering their options.
Combined with fixed rates drifting lower, Sojonky also says some borrowers with variable rate mortgages are starting to make the switch and lock in their loans.
“Variable-rate clients who touched base in the spring and vacillated are now calling back with instructions,” said Sojonky, an adviser with Verico Paragon Mortgage Group in West Vancouver, B.C.
“We saw fixed rates begin to inch up in the summer, only to drift down again recently — and some clients are pouncing in reaction.”
According to RateSpy.com, the best five-year fixed rate in Ontario available this week was about 2.28 per cent, while the best five-year variable rate mortgage was 1.75 per cent.
That gives the variable-rate mortgage just a 0.53 percentage point advantage over the fixed-rate offering and if the Bank of Canada starts to boost its key interest rate next year, that advantage will shrink even smaller.
When the Bank of Canada cut its key interest rate twice this year, borrowers with loans or mortgages linked to the big bank prime rates benefited, seeing their interest rates move lower.
However, if the economic recovery remains on track, many economists expect the central bank’s next move on interest rates will be to hike its overnight rate target, which will likely result in higher rates for variable-rate loans and mortgages.
“If you’re only looking at the interest rate spread, then it probably makes sense to take a five-year fixed if you think there is any likelihood of the Bank of Canada increasing rates any time soon,” said Jason Scott, an Edmonton mortgage broker with TMG The Mortgage Group.
However, Scott says you need to consider more than just the rate, especially if you think you might have to sell your house or refinance your mortgage before your term is up.
Typically, the pre-payment penalty charged by the big banks for ending a fixed-rate mortgage early is the greater of three months interest or interest for the remainder of the term on the remaining balance calculated using the difference between your interest rate and the bank’s posted rate.
That compares with three months’ interest on the remaining balance for a variable-rate mortgage, which Scott says is generally less than the fixed-rate penalty.
“Do you really know you’re going to be there for five years?” he said. “The reality is most five-year mortgages don’t last five years. Something happens. Typically, it is three and a half to four years; people do something.”