Posted 12.9.13 @ 12:17
You’re a wealthy homebuyer and you’ve been looking at your options – variable rate mortgages have long been touted as a riskier option, but you can also get big savings. In the beginning most VRMs start off with a fixed interest rate and then later on transitions into a variable rate mortgage. Once it flips the switch to a VRM, you can refinance and get lower interest rate.
But many wealthy homebuyers are opting to stick with their adjustable rates – especially since rates are at all-time lows. Savings over time compared with higher fixed interest rates can be substantial, and if you’re not paying all those fees for originating a refinance, the savings can be even better.
History of the Housing Bubble
During the American Housing Bubble, many homeowners got stuck in variable rate mortgages when the rates shot up, losing their shirts. But today Canada is facing the opposite problem – super low interest rates. They may not be all that great for the economy and savings growth, but they are great for people trying to buy a home.
With so many years of low rates, and rates expected to reach 5% sometime in the next 5 years, VRMs make sense. According to a recent Bank of Canada report, about 40% of outstanding VRM loans weren’t refinanced or transitioned back into a fixed rate mortgage. This means almost half of the people with a VRM we happy and kept it.
The Jumbo Jungle
It’s important to note that the report only looked at mortgages with a fixed rate period of 2 years or more. If you’re looking at an ultra-short term mortgage, your mileage may vary!
But a trend is beginning to emerge. Over the last 3 years 40 to 50% of wealthy homebuyers with private ARMs have skipped refinancing – and in most cases, if you don’t push refinancing you just have to renew. Over the last 20 years, most have transitioned back to a fixed rate mortgage.
But how safe is it, really? It depends on how much you’re paying and what kind of deal you’re getting.
Most wealthy homebuyers are financed through wealth management programs, which are notorious for lower interest rates and a wide range of perks.
Is it Worth the Risk?
You need to sit down, take a careful look at your finances and ask yourself if it’s really worth the risk to go with a Variable Rate Mortgage instead of a Fixed Rate one. You’ll be able to lock in a low rate now and you may have a rate that slowly increases later.
If you’re working with a jumbo mortgage, you may have to later refinance it 10-20 years down the road if you keep carrying the debt, and that could cost you more in origination fees. But if you’re planning to pay down your mortgage quickly, if you’re planning to capitalize on the short term now for a long term gain, a VRM may just be worth the risk!
We’re not mortgage brokers, so we can’t help you find a low interest mortgage – but we can help you sell a home and buy a new one! Give us a call today and find out what the Goodale Miller Team can do for you.