Wednesday, January 27, 2010

Should I lock in at 5 year or variable mortgage interest rate?

Another great question from an interested reader, and my answer below

Hi Mark,

After looking through a whole bunch of Google results, I found yours the
most intelligent and sensible. So, if you don't mind, I would like to ask
you this at this point in time, as your posting is somewhat old:

I am being offered these two options before my March 2 renewal date on a
$202,000 mortgage with 23 yr. amortization:

1). 5 Year Closed @ 3.81% - 23 Year Amortization with Weekly Regular
Payments: $252.77

2). 5 Year Variable @ Prime Minus 0.35% (currently 1.90%) - 23 Year
Amortization with Weekly Regular Payments: $208.32

Which one would YOU choose?

H.S.A. Harry, Calgary, Alberta, Canada

Hi H .,

I am a firm believer in paying that mortgage off. We may never see today's'
rates again. I would go with option 2 and have your bank lower your
amortization on renewal until the payment is $250 per week. This should
reduce your amortization to about 18.2 years, see the calculator here:

Then in 5 years when it comes time to renew, you will only have 13 years
left to go on your mortgage.

Even if the prime rate increases, which it is supposed to, the 5 year
variable has to climb to about 5.5% for you to be even compared to the 3.81%
mortgage for 5 years and you will still be ahead of the game. Reason is, it
may take 2 years to reach 5.5%, if ever, and then you have saved a pile in
interest in the first 2 years of your mortgage. You should be earning more
in 2 years from now and look at it as an investment in yourself.

Also, in 3 years, you can renew that 5 year mortgage and who knows, there
may be some good specials out there that you can take advantage of.

You should be better off in the long run going short term, read my
experience here:

All the best!

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