Thursday, May 13, 2010

mortgage rate advice

Harry has written me a few times about how happy he is since he followed my advice about taking the variable rate mortgage, he's saved plenty of money.


I keep referring to this letter from time to time and when I discuss mortgages with friends. I have never ever gotten a more elegant, lucid, well-informed explanation and advice on mortgages since nobody has ever indicated how much I stand to gain if I stay on a floating rate as opposed to keeping it locked. It is a complicated matter which most real estate/mortgage agents are not competent or knowledgeable enough to answer.
I am glad I asked you!!!

Thanks again. Have a wonderful day!
Harry, Calgary, Alberta, Canada

Hi Harry,

Thanks again for your kind words. Just yesterday, I had another discussion with a colleague of mine who has his MBA and he too agrees completely with my logic. After crunching through the numbers based upon current 5 year variable rate mortgages that are about prime minus .5% and this is still far superior compared to locking in at 4.5 or 5% or even higher.

The prime rate would have to reach about 7 or 8% before one would break even, not something
that seems likely to happen for many years to come, maybe not for at least 5 to 10 years. Variable is the way to go, for now.

The banks may eventually 'flip' on the current philosophy. Meaning that once prime gets to 4 or 5% they may change their short term rates to prime plus .5% or 1% but you will still be far ahead of the game by that point.

If this happens, maybe then you would consider locking in. Again, that's many years down the road based upon the economic forecasts over the next few years.

All the best!

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