What’s better – a variable or fixed rate mortgage?

Scenario:

Rick and Karen have a $100,000 mortgage, which they locked into a 5% fixed-rate in 2008. With interest rates currently more attractive, they’re wondering if they should leave well enough alone or look to convert their mortgage to a variable-rate option?

Todd Asman, Vice-President, Banking and Mortgage Operations and Sara Kinnear, Senior Tax & Estate Planning Specialist say:

If Rick and Karen were Investors Group clients, I would advise them that any choice about a mortgage needs to be firmly based on their personal financial objectives, their overall plan for their family financial future, and what some experts term their insomnia factor. Along with their Consultant, they may want to investigate an alternative arrangement that offers a combination of fixed and variable-rate mortgage financing.

This could include a blended mortgage, that is, a mortgage that offers both a fixed and a variable component. Another option could include using a portion of a line of credit at a much lower rate (variable) to pay down lump sum amounts of the fixed-rate mortgage, thereby lowering overall interest payments. They should also look at what insurance might best suit their needs should Rick or Karen become ill or die before the mortgage is paid off. Todd’s final word: Take a close look at the features of your mortgage before making any decisions and speak to a professional.

According to a study completed by Ipsos Reid, a fixed-rate mortgage is still the most popular choice; however, variable-rate demand is expected to increase due to the current record breaking low prime interest rate.

Sara recommends keeping the following benefits in mind if you’re a first-time home buyer:

  • Increase to RRSP Home Buyers’ Plan – In 2009, the government increased from $20,000 to $25,000 the amount that you can withdraw from your RRSP on a tax-free basis to buy or build a home. This increase is effective for withdrawals made on or after January 28, 2009. To qualify, you must be a “first-time home buyer”.
  • First-Time Home Buyers’ Credit – First-time home buyers are also eligible for a federal non-refundable tax credit of $5,000, worth 15% of that or $750 in tax relief. This credit is available for purchases made on or after January 28, 2009.

Working through all of the above with an Investors Group Consultant will help Rick and Karen determine the best course of action for their situation.

Todd Asman, B.Comm., FCIA, FSA
Vice-President, Banking and Mortgage Operations

Todd is an actuary who leads our Banking and Mortgage division. He ensures Investors Group has high-quality banking partnerships and is able to provide highly competitive banking and mortgage solutions as part of our overall client offering.

Sara Kinnear, BA, LL.B., CFP®, TEP
Senior Tax and Estate Planning Specialist, Advanced Financial Planning Support

Sara is a lawyer specializing in personal tax and estate planning. She is an expert on all forms of registered products and provides specialized training and support to Investors Group Consultants on a wide variety of financial planning issues.

Written and published by Investors Group as a general source of information only. It is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax, legal or investment advice. Readers should seek advice on their specific circumstances from an Investors Group Consultant.