Over the past month or so, we’ve seen both variable/adjustable mortgage rates and fixed mortgage rates increase, due to the higher cost of funding on the lenders’ side of things. Adjustable rates are tied to the lenders’ prime rates, and fluctuate as prime rates move. These rates can be prime minus a discount or prime plus a premium.
Regarding the recent history of adjustable rates, the increase in rates with our lenders has been from prime minus a discount as low as 0.6%, to prime plus 1.0%. That means that adjustable rates have increased up to 1.6% with some lenders. So does it make sense to choose to go with an adjustable rate mortgage over a fixed rate mortgage?
Initially, one would think no, since the comparison of today’s adjustable rates to what rates were a month or two ago is a significant increase. Overall, however, rates on adjustable rate mortgages (ARMs) are still lower when compared with fixed rate mortgages.
For example, as of today (November 10, 2008), our lowest fixed rate mortgage on a five year term is 5.4%...and that doesn’t include any pre-payment privileges because it’s a No Frills mortgage (meaning the lender is able to provide a lower rate in exchange for not giving the applicant any pre-payment opportunities). Current adjustable rates are sitting at prime plus 1%, so the rate is 5.0%. That’s a difference between adjustable and fixed rate of about 0.4% – and with the adjustable rate mortgage, you still have pre-payment privileges.
Another interesting feature of ARMs is that you’re able to lock in your adjustable mortgage as a fixed rate mortgage at any time (this is done at current market fixed rates, and not at the variable rate you have). There is speculation that fixed rates could fall within the next few months, so a great option is to get a adjustable rate mortgage now, and watch fixed rates closely for any decreases then lock in when a rate you’re comfortable with comes along.
There is another option for those who aren’t comfortable with a floating mortgage rate one year terms. Frequently, one year fixed rate mortgages offer significant rate savings when compared with other terms. Today’s one year fixed term rate is 4.8% (with regular pre-payment privileges). With the current state of the economy and the Canadian mortgage market, a one year mortgage will give you a competitive interest rate that allows you to reevaluate how things are going in a year and gives the financial market time to settle down, and rates a chance to potentially decrease.
If you’re interested in a adjustable rate mortgage, or would like to discuss with one of First Foundation’s representatives what your mortgage financing options are, please contact us!