Friday, August 29, 2008

Fixed vs Variable What to do?

Fixed versus variable rate mortgages

Recent rumblings in the financial markets have made some homeowners nervous – especially those with mortgages that may be coming up for renewal. With inflation creeping upward and interest rates threatening a continued rise, is this the time to lock-in a fixed rate mortgage? Or is the upward pressure on interest rates merely a short-term event, thus making a variable rate mortgage a better gamble over the longer term?
Your choice should be firmly based on your personal financial objectives, your overall financial plan, and what some experts term your insomnia factor. You may also want to investigate an alternative arrangement that offers a combination of fixed and variable rate mortgage financing.

Know the differences

A fixed interest rate mortgage provides the security of a ‘locked-in’ interest rate for a specified period of time (usually five years). A variable interest rate mortgage usually offers a lower initial interest rate but that rate can go up or down, often tied to prime interest rate levels.

Know your mortgage

Take a close look at the mortgage ‘features’. For example, is it portable? – meaning can you move it from an existing home to a newly purchased home without penalties or having to renew it? If you intend to increase your mortgage for a renovation or to purchase a vacation property, will the new rate be ‘blended’ with the old or will you have to renegotiate at a higher rate?

Know yourself Ask yourself questions like these:

  • Do I want to pay off my mortgage as quickly as possible or am I better off focusing more on investing for retirement?

  • Do I want the lowest cost mortgage?

  • Do I want my mortgage paid off by the time I retire?

  • Should I consider converting my mortgage interest costs into a tax deductible investment expense?

  • Do I want a low-rate mortgage so I can borrow against it for investments, a reno, or to consolidate other higher-interest debt?

  • Can my budget stand short-term interest rate increases and the ‘payment shock’ that can happen with a variable rate mortgage?

  • Similarly, will interest rate increases lead me into ‘negative amortization’? This is a gradual increase in mortgage debt that occurs when your fixed monthly payment doesn’t cover the increasing interest due. It can add years to your mortgage.

  • Can I sleep at night? Ahh, the insomnia factor – any investment, including your mortgage, is probably not right for you if you constantly worry about it.

Before making your final mortgage decisions, it’s a good idea to seek the advice of a professional advisor.

John Scholl B. Mathematics, CGA,

Wealth Management & Financial Planning
Please contact him at 416 731 3660

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