Faulkner: Fixed or variable for mortgage renewal?

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With expectations of mortgage rates dropping over the next year, what are the best mortgage options today?

A fixed-rate mortgage guarantees your rate over the term of the mortgage. That term could be between one and 10 years, with most borrowers choosing between a three- or five-year term.

As of this writing, the best fixed rates available are around or just over four per cent.

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A variable-rate mortgage has a floating rate based on the prime rate. The borrower’s payment may stay the same over the term; however, the interest rate may vary. If the rate goes down, more of the borrower’s payment goes toward the principal, that is, the amount owing on your mortgage.

If the interest rate increases, more of your payment will go towards the interest rather than the balance owed and in some cases, the interest could be more than your pre-set monthly payment.

A variable-rate mortgage has some advantages. Most lenders will allow the borrower to lock into a fixed-rate mortgage anytime during the term. If a lender has three years left on their mortgage, they could lock into a three- to five-year fixed mortgage when and if they choose to.

Another advantage of a variable rate is flexibility. Most lenders will charge a three-month interest penalty to get out of the mortgage should your life situation change and you decide to sell your home.

In a fixed-rate mortgage, the lender will typically charge a penalty equal to the interest differential for the balance of the mortgage term. This differential charge happens only if rates go down, not up. Depending on the size of your mortgage, the balance left on the term and the interest rate differential, that penalty could be in the tens of thousands of dollars.

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To choose the best mortgage type, we would have to know the future mortgage rates and how long we plan to keep our homes. Of course, we don’t know the future rates or how our lives may change.

Most economists anticipate that mortgage rates will continue decreasing over the next year.

With anticipated continued recessionary pressures in the Western world today, I would suspect that we may see fixed-rate mortgages hover between three to four per cent over the foreseeable future, perhaps 10 years or more.

If I were renewing my mortgage today or getting a brand new mortgage, it would likely be a toss-up between a three-year fixed mortgage and a five-year variable mortgage.

If I could get a three-year mortgage at around or just over four per cent, I would likely choose that if I were renewing at this time.

If I chose a variable rate today, that rate is around 5.5 per cent as of this writing.

My best guess is that a three-year term might average out lower over the term of the mortgage. In some ways, choosing a mortgage is like being in Vegas, where we roll the dice and hope for the best.

Dennis Faulkner, B.A. Economics, works as a realtor at MaxWell Challenge Realty. He can be contacted to answer your real estate questions at [email protected]

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