Of Prime Interest: Risk/reward: it’s your mortgage

There are some financial institutions which allow us to diversify our mortgage interest rates—part locked in, part variable rate.

  • Nov. 5, 2014 2:00 p.m.

We all have a choice to make when it comes to choosing our mortgage. Do you go with a fixed rate option or do you let the mortgage rate float with a variable rate mortgage.

The safe route is to lock the rate in knowing you are guaranteed a specific interest rate and payment that is set for a period of up to 10 years. The most popular fixed rate mortgage is the five year fixed currently being offered as low as 2.89 per cent.   At the end of the term in addition to the constant payment there will definitely be a specific reduction in the principal amount of the mortgage and, for some, this is truly peace of mind.

The higher risk and possibly greater reward when it comes to choosing a mortgage is to opt for a variable mortgage whereby the interest rate floats (typically below) the financial institution’s prime lending rate. Currently the variable mortgage is being offered as low as .70 per cent below prime resulting in a variable mortgage rate as low as 2.3 per cent.

The reward for the risk is, of course, the lower interest charges. In addition to paying less interest this option will likely afford lower payments than a fixed mortgage (as above) but what you have to keep in mind is if the prime interest rate increases so too will the rate being charged on the variable mortgage.

If the variable is the option you choose you should be aware of what is happening to the prime interest rate. As always with a variable rate mortgage you have the option to convert to a fixed rate—the fixed rate the financial institution is offering at the time of conversion.

Diversify your mortgage

There is an alternate solution to locking in or floating our mortgage interest rate on the total mortgage. There are some financial institutions which allow us to diversify our mortgage interest rates. This is done by taking a portion of our mortgage and locking the rate in for a specific term and placing the balance of the mortgage in a variable (floating) interest rate. There is the availability and option to have different components under the one mortgage being registered against your property thereby allowing you to secure the absolute best mortgage rates available.

An example illustrating this procedure is you are purchasing a home for $300,000 and have a down payment of $60,000 resulting in a mortgage of $240,000. You choose to lock in $140,000 at 2.89 per cent and place the remaining $100,000 in a variable rate of prime less .70 per cent—2.3 per cent. By choosing this option you have reduced your risk by knowing it won’t be such a financial blow should the prime rate increase only on a portion of your borrowed funds.

A recent survey has shown 40 per cent of Canadians who are in the market to purchase a home in the next two years favour this combination mortgage.

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