1 Year Fixed vs. a Variable Rate?

Posted on July 23, 2009 at 8:49 pm
Filed Under Mortgage Planning

With interest rates holding true based on the Bank of Canada’s recent announcement, a question that people are asking is should I consider a one year fixed rate or a variable rate mortgage?

Here are some things to think about:

Today’s variable-rate mortgages still have higher interest rate premiums relative to those in the past
A 1-year mortgage doesn’t lock you into a rate for 3-5 years which means you can refinance in 12 months when (hopefully) discounts to prime might be back
The rates are comparable: Variable and 1-year mortgages are both based on short-term interest rates, so they move together over time
In some unique cases, rates on 1-year mortgages are better than today’s best variable rates
The most flexible 1-year mortgages are convertible into a fixed OR variable rate at any time, and at no cost
1-years give you a chance to haggle with your lender again in 12 months which may or may not be a positive for you
If rates go up in the next 12 months, you’re protected for the remainder of the term in a fixed-rate mortgage
If rates steadily climb over the course of five years, 1-year terms could help you come out further ahead because 1-year rates reset slower than variable rates—which is helpful when rates are rising
1-year payments are fixed for a longer period of time than variable payments which makes budgeting easier

Your Take-Away: Any time you are making a decision regarding the term and structure of your mortgage, it is imperative to take into account all of your options along with the pros and cons of each. The truth is, there is no “one size fits all” solution which is why a proper consultation can prove to be so beneficial and necessary.

After all, the only way to truly know which term or structure is best for you is to a number of different variables including your epected time in your existing home, your current cash flow needs and flexibility, your overall goals and objectives in terms of your mortgage, and so on. Don’t think that just because one option may have a better rate then the other that your answer is easy…there is far more to this decision then just looking at the rates.

As always, have a Terrific Thursday!

Chris and Elisseos

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