With Rates Dropping, Should You Consider Switching To A Variable Rate Mortgage?

Year 2007 was a crazy year for interest rates. The economists just couldn’t get it right. During the first half of the year, economists were expecting rates to drop. However, by July 2007, the trend reversed quickly. Due to strong economic indicators and higher inflation rates, interest rates shot up by 1/2% in a span of 2 months and another 1/4% after another month. The best 5 year discounted mortgage rate reached 5.99% sometime in October 2007. Many home buyers sought the peace of mind of a fixed (locked-in) interest rate mortgage.

We now know that rates are on the decline as the full effects of the US subprime mortgage mess is now being felt. The Bank of Canada has already dropped their overnight rates twice (by 1/2 percent) during the past 60 days. There are expectations that interest rates may go down by another 3/4%. If this happens, you can expect the prime rate to drop to 5% and the variable mortgage rate to 4.5% (assuming a mortgage priced at prime less 1/2%). Does it make sense to consider switching to a variable rate? Let’s run the numbers.

Let’s assume you have a $350,000 mortgage at 5.99% and there is still 5 years to go on your mortgage. Over a 5 year term, you would pay total interest of $101,810.86. If you were in a variable and rates dropped to an average of 5.0%, your total interest paid over 5 years would be $84,761.94. This is a savings of $17,048.92. If rate dropped even lower to an average of 4.5%, your total interest savings will be even higher at $25,655.12. This savings have to be weighed against any prepayment penalty your lender will charge you.

If you need clarification, please do not hesitate to contact me.

Purchase Your Investment Property with No Money Down

Firstline Mortgages, a subsidiary of CIBC, is the first lender to offer zero down mortgages for rental properties. Mortgages will be insured by the Canadian Mortgage and Housing Corporation (CMHC). Previously, the minimum requirement was 10% down under Genworth’s Small Rental Programme.

To qualify, borrowers need good credit (min. of 680 beacon score) and proof of ability to support the debt. The property must meet Firstline and CMHC’s standard guidelines. Borrowers are will get Firstline’s best discounted interest rates. If you are interested in this programme, be sure to phone or email me for more details.

Obtain a Tax Refund On Your Home Purchase Using Your RRSPs

The Federal Home Buyer’s Plan allows first time home buyers use up to $20,000 of their RRSPs for the purchase a home. For a couple, the amount is doubled to $40,000. If you are in the market today, making use of this privilege may allow you to obtain a significant tax deduction. The optimum time to make use of this benefit is before February 29, 2008. A contribution before this date will allow you to obtain the deduction on last year’s income resulting in a tax refund.

Say, for example, you make a $40K investment in an RRSP today and you are in the 30% marginal tax bracket. You would could obtain a tax refund cheque for $12000 (or 30% of $40K). This is nothing to scoff at.

Be sure to consult your financial adviser before proceeding with any investment. Please call me if you need more information or clarification.