Variable rate mortgages are now priced at Prime less 0.50%

It’s getting harder to sell a variable rate mortgage (VRM) these days. A few months ago, you could get a variable rate mortgage at Prime less 0.90% (or even 0.95%). Now, all but a few lenders have bumped up their rate to Prime less 0.50%.

We have the US Subprime crisis to thank for this. Investors (who purchase these asset backed securities) are now thinking that there’s more risk to these securities than original thought. Consequently, they want to get a higher yield for this.

With the prime rate at 6.25% and the discount at 1/2 percent, a (new) VRM holder will be paying 5.75%. That’s not much of a discount to the current 5 year rate of 5.79%. That’s a far cry from when VRMs were at 3.0% compared with the 5 year mortgage rate of 5.4% in July of 2004. With no strong pressure for interest rates to drop, a VRM is, in my opinion, not an attractive proposition anymore.

Of course, there are other options besides at 5 year term mortgage (which most people seem to automatically take). If you really want peace of mind, you may opt for a 7 year mortgage at 6.0% or a 10 yr mortgage at 6.2%. The premium is quite small for a much longer term.