Homeowners should try to stick with variable mortgages
By BY ROMINA MAURINO, THE CANADIAN PRESS - June 21, 2008
Homeowners looking to renew their mortgages should resist the urge to lock in to the safety of a fixed-term mortgage in the face of rising rates if they can stomach the more nerve-wracking ride of a variable mortgage, experts say.
The prospect of a mortgage that rises and falls with prime rate changes may cause some unease -- especially following last week's announcement by the Bank of Canada not to cut interest rates and the subsequent hike in mortgage rates by several of the country's biggest banks. But experts say they may still be worth the trouble because they will save more in the long run.
"Right now, if it was me that had the variable, I'd be sticking with it because I'd look and say that even with that increase that's expected to happen, (you'd save) money over that net period of time," said Mark Olkowski, regional manager at Invis, one of Canada's largest mortgage brokers.
"Taking the fixed term, paying the premium to actually have it locked in so they can sleep at night may not be worth it in the long run." Many people who opt for fixed mortgages do so for the security they provide -- they like knowing what their payments will be every month, and may be spread too thin financially to afford much more.
But variable mortgages often offer more flexibility, and have more prepayment options for those wishing to pay their mortgages off faster.
"If it becomes important to pay off the mortgage faster, they can lose a little bit of those pre-payment options if they do fix in for a longer period of time," Olkowski said, noting that a fixed mortgage may allow for a 15 per cent pre-payment option, while variables are usually around 20 per cent or higher. If the fluctuation of a variable becomes too much, there's also usually the option to lock in at any time.
"You can never be 100 per cent sure. All you can say is: 'What's more important to me?"'