Variable vs Fixed – How About a Convertible?

With current market conditions and the recent rate drop announced by the Bank of Canada.  Many advisor’s have been pushing the variable rate mortgage as opposed to the fixed rate mortgages.  Clients are even calling in requesting a variable rate mortgage over the fixed rate mortgages.  In my opinion its great and all how rates are historically low–but what comes up, must come down.  Or in this case it’s the other way around.  In 2009 I can’t see rates consistently dropping and I can’t see myself giving mortgages at 2.00% or 3.00% (if rate cuts remain aggressive).  My point being is that if we advise our clients to go Variable then when 2009 rolls along and their only 12 payments into their mortgage and they see a rate hike, one of two things can happen.  1-depending on the lender they will see a significant increase in their monthly payments or 2-depending on the lender they will see a significant increase in there amortization periods some over 60 years!  When it comes to Variable rate mortgages, some lenders fix the monthly payment, so if rates go up, their payment doesn’t change, just the length of their amortization.  It’s still a Variable rate product, just with fixed payments.  And some lenders don’t fix their payments, so if rates go up, so will their payments!  Also, to mention, some lenders have options to do either or, fix your payments or not to fix.

This being said, i try not to steer my clients in any direction, fixed vs. variable, as I am not an economist, but I can provide stats on what the market is doing today, not tomorrow!  Even though Variable mortgages have been proven to be a money saver 8 out of 10 times, I still may come to the conclusion that in today’s market, maybe a good way to go is Convertible!  As stated here in this great real estate website, a convertible rate mortgage is a Variable Rate Mortgage product that allows all borrowers to fix the rate of their variable rate mortgage at any time with no penalty.  Due to the current declining rate environment, the Convertible Rate Mortgage is a very attractive product to offer customers because of the low rate and flexible options.  While there maybe an increased number of customers requesting Variable Rate mortgages, VRM’s or ARM’s are not always the right product for the customer.  Many of these customers may be better suited for a Convertible Rate mortgage.

Benefits of Convertible mortgage:

- Allows customers to take advantage of interest rate fluctuations.
- Typically has a lower interest rate in comparison to other mortgage terms.
- The option of converting to a longer closed term at any time — at no cost to the
customer.

In conclusion, when in doubt…go Convertible!

Best Regards,

*Sterling
sterling@xpx.ca
877.979.4979

TD Special Report

Is the Credit Crunch Pushing the U.S. Federal Reserve to its Limit?

Highlights on this report are:

•   Since  the  onset  of the global credit crunch in August 2007, the U.S. Federal  Reserve has resorted to a slew of innovative (and sometimes unconventional)  approaches  to  dealing  with  the  problems  faced  by    distressed U.S. financial institutions.
•   The  effort  has  been  part  of  the  Fed’s  attempt  to  stave  off a  full-fledged  financial sector meltdown, and to blunt the adverse impact of the ongoing disruptions on U.S. economic activity.
•  Despite the massive amounts of liquidity injected into the money market, we  do  not  expect  the measures  introduced  to  pose any significant inflationary risks to the U.S. economy.
•   Moreover,  we  do not believe that the Fed’s ability to provide further liquidity  injections  into  the  financial system is compromised by its current level of commitment.
•   But  should  the  Fed’s cupboard become bare, there are several options that it can pursue to address any shortcoming it may face.
•   Ensuring  stability  in the financial markets has enormous implications for  the  economic wellbeing and prosperity for any society such that it becomes imperative for it to be pursued at reasonable costs.

To request a copy of this report, email me at sterling@xpx.ca