It’s the talk of the town once again. Interest rates. Savers are praying for an increase while those in debt have their fingers tightly crossed that any rise will come oh so slowly.
The big issue for most is the mortgage. Variable used to win hands down over fixed rate when it came to saving money.
But as five year fixed rates sunk below three per cent and the spread between fixed and variable rates shrunk to less than 40 basis points or 0.4 per cent, locking in has been a no brainer. There is little point in taking on the additional risk of a rate rise for less than half a per cent.
Based on the Canadian Association of Accredited Mortgage Professionals’ recent survey, 85 per cent of those who bought a home in the past 18 months locked in, compared to 69 per cent of existing mortgage holders. The appeal of the fixed rate will only grow with the flurry of talk about impending interest rate increases.
Already a number of lenders have nudged their five-year rate over three per cent. This could signal that the variable rate mortgage may start to become more appealing as the difference between it and the fixed rate widens.
According to canadianmortgagetrends.com, consumer interest in variable rates increases when the spread between them and fixed rates is 100 basis points or one per cent.
It is easy to see why. Paying one per cent less on a $200,000 mortgage keeps about $2,000 after tax dollars in your pocket in the first year and saves nearly $32,000 in interest costs over a 25-year amortization.
Canadians choosing a fixed rate can enjoy the benefits of a variable rate simply by paying a bit more monthly. On a $200,000 mortgage an extra $50 cuts two years off the life of the mortgage and saves nearly $7,000 in interest costs. Or, make a lump sum payment, amounting to the average tax refund of $1,500, and the mortgage is gone in 21 years with interest savings of nearly $15,500.