Today we’re going to quickly go over variable rate mortgages and the convertibility or “lock-in” feature that you get with most variable rate mortgages. I personally am a huge fan of variable rates and I would take a variable mortgage myself, however I find that a lot of people who are considering a variable are actually considering it for the wrong reasons and the convertibility feature is the main one.
In a variable mortgage, as you know, the rate will go up and down with the prime rate changes meaning every month you could be paying more or less. This uncertainty means that in the future you might be paying more than you started out with and if you don’t have more income or you have been spending all of your savings you might get yourself in a bit of trouble. Here’s where the convertibility feature comes into, supposedly, save the day, you can lock your mortgage into a fixed rate at any time with no penalty. This seems to be perfect, but there are two issues with this is:
You’re wasting all of your savings. – if you’re going to take a variable rate it is a really long term strategy you have to make sure you have enough money or income coming in to pay for the mortgage as your payments increase because over the long term, based on many studies, in 90% of the cases you will come out ahead versus if you had taken a fixed rate.
The fixed rate you are going to receive when you decide to convert is most likely going to be higher or worse than had you just taken a fixed rate right from the beginning. There are several reasons for this; mortgage rates right now are almost at an all time low so there’s no reason not to take a fixed rate if you don’t like the risk. Secondly you’ll lose any kind of incentive, you are already committed with that particular lender and they don’t really have any incentive to give you any extra discounts if you decide to now take a fix rate from them because you still probably have 2-3 years left on your contract. Again more savings are going down the drain.
So if you’re thinking about it and you’re not sure if you’re looking at variable rates the right way talk with your mortgage broker or give us a call today!